2019 Investment Forum: Market regulation in a superstar economy (3/5)

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The digital age has brought dramatic benefits to society, but also costs and it often falls to governments to implement regulation to minimise these costs. At the BNP Paribas Asset Management 2019 Investment Forum, 1994 Nobel Prize winner in Economic Sciences Jean Tirole from the Toulouse School of Economics discussed the challenges of regulating market power in a disrupted global economy.

Regulators are having to take into account the rising ‘techlash’ in society, with growing calls for large tech companies to be broken up, regulating them as public utilities, using tougher antitrust enforcement, or engaging in industrial-policy programmes in big data and artificial intelligence (AI).

Regulating change with agility

One of the challenges regulators face is antitrust policy. In the past, when regulators took on monopoly providers such as AT&T or Standard Oil, identifying and separating the essential parts of their business (e.g., the local telephone loop, rail tracks and stations) was simple.

With tech companies, this is more challenging because businesses are changing rapidly. In the case of data, it is hard to separate data from the activities that generate it. For professor Tirole, competition policy and consumer protection are the best tools to manage the industry, but regulators need to adapt them to a digital context and make them agile.

Regulators strive to preserve competition in a market so that consumers receive the best service at the best price. In the digital age, this means assessing the behaviour of incumbent firms to ensure that tie-ins or loyalty rebates, for example, do not limit price competition. Acquisitions can be used to take a rival out of a market, or ’best price’ guarantees can end up allowing a platform to tax non-users.

Given the dominance of US and Chinese technology firms – all of the world’s largest 20 technology companies are from these countries – there have been calls, particularly in Europe, for the greater use of industrial policy to promote ‘regional’ champions. The proposed merger of Alstom and Siemens was the most recent example, albeit in another industry.

Industry policy – yes or no?

Arguments in favour of industrial policy are that there are cluster effects (infrastructure and information sharing, the potential for low-cost job mobility), industry spill-overs of public research & development, or the preservation of competition (the argument for having both Airbus and Boeing).

Economists are nonetheless sceptical. History shows that governments rarely succeed in picking winning industries or companies, and the involvement of the state increases the risk that it becomes captured by the industry itself. There are exceptions, however, such as the US Defence Advanced Research Projects Agency, the National Institute of Health, and the National Science Foundation.

The lessons for our portfolio managers were that they need to follow regulatory policy closely and monitor how it is adapting to the digital age so that they can anticipate changes that could affect the value of the companies they have invested in. Whether it be the breakup of a company or the imposition of new requirements such as GDPR, the repercussions of regulation can be dramatic.

This is part 3 of the Investors’ Corner series on the main points from the four keynote speakers at the BNP Paribas Asset Management 2019 Investment Forum.

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Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.

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Daniel Morris

Senior investment strategist, CFA charterholder

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