Unit 3: Jean Triole wins the Nobel Prize for Economics

The 2014 Nobel Prize has been awarded to a microeconomist who has done a huge amount of work on the economics of large-scale businesses operating in monopolistic and oligopolistic industries. 

In the Q&A during the prize announcement, Tirole discussed some of his work on network/platform businesses such as Google.

Web search has aspects of natural monopoly - Google dominates in many different countries. And they set price well below cost -- as a customer you get a very good deal from Google, while advertisers, pay a lot. Consumer surplus is highly relevant here. 

But the cost structure of such industries has a strong tendency to lead to dominant monopoly power - Tirole argues that industry regulation needs to ensure that dynamic firms can replace complacent, rent-seeking monopolies in the long run.

Here is the press release from the Nobel Academy - it is well worth a read

"Many industries are dominated by a small number of large firms or a single monopoly. Left unregulated, such markets often produce socially undesirable results – prices higher than those motivated by costs, or unproductive firms that survive by blocking the entry of new and more productive ones.

From the mid-1980s and onwards, Jean Tirole has breathed new life into research on such market failures. His analysis of firms with market power provides a unified theory with a strong bearing on central policy questions: how should the government deal with mergers or cartels, and how should it regulate monopolies?

Before Tirole, researchers and policymakers sought general principles for all industries. They advocated simple policy rules, such as capping prices for monopolists and prohibiting cooperation between competitors, while permitting cooperation between firms with different positions in the value chain. Tirole showed theoretically that such rules may work well in certain conditions, but do more harm than good in others. Price caps can provide dominant firms with strong motives to reduce costs – a good thing for society – but may also permit excessive profits – a bad thing for society. 

Cooperation on price setting within a market is usually harmful, but cooperation regarding patent pools can benefit everyone. The merger of a firm and its supplier may encourage innovation, but may also distort competition.

The best regulation or competition policy should therefore be carefully adapted to every industry’s specific conditions. In a series of articles and books, Jean Tirole has presented a general framework for designing such policies and applied it to a number of industries, ranging from telecommunications to banking. 

Drawing on these new insights, governments can better encourage powerful firms to become more productive and, at the same time, prevent them from harming competitors and customers."