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2014-10-14 12:57:41
Oct 13th 2014, 12:45 by C.R. | LONDON
AFTER last year's three-way split, this year's Sveriges Riksbank prize in
economic sciences in memory of Alfred Nobel goes to a single receipient, Jean
Tirole of Toulouse University in France (pictured). He has been awarded the
prize for his microeconomic research investigating how large firms should be
regulated in order to prevent consumers being damaged by their monopolistic
behaviour.
As the Royal Swedish Academy of Sciences notes on its website:
Jean Tirole is one of the most influential economists of our time. He has made
important theoretical research contributions in a number of areas, but most of
all he has clarified how to understand and regulate industries with a few
powerful firms.
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.
Unlike some previous recipients, such as Robert Engle and Clive Granger in 2003
or Lars Peter Hansen in 2013, who won the prize for developing new econometric
methods few laymen can easily understand, Mr Tirole's research has direct
relevance to current policy issues. Most notably, his ideas of how to regulate
industries dominated by a single large firm are helping to produce strategies
for how to prevent Google from using its vast market share in the
internet-search business to behave as a monopoly. And as we argued back in
March, Mr Tirole's theories can also help us understand the impact on markets
of disruptive forces such as Uber, a taxi app that matches customers and
drivers. For those readers who want to read more about Jean Tirole's research
and his career in more detail, here are some links that may be of interest:
From economist.com:
Pricing the surge: The microeconomics of Uber's attempt to revolutionise taxi
markets (March 2014).
http://www.economist.com/news/finance-and-economics/
21599766-microeconomics-ubers-attempt-revolutionise-taxi-markets-pricing-surge
Making pay work: Why bosses should be careful when using performance-related
pay (May 2013).
http://www.economist.com/news/finance-and-economics/
21578377-why-bosses-should-be-careful-when-using-performance-related-pay-making-pay-work
Microeconomics: A golden age of micro (October 2012).
http://www.economist.com/blogs/freeexchange/2012/10/microeconomics
Looking good by doing good: Rewarding people for their generosity may be
counterproductive (January 2009).
http://www.economist.com/node/12932242
Beyond irrelevance: Why companies' financial structure matters after all
(February 2006).
http://www.economist.com/node/5492253
Matchmakers and trustbusters: "Two-sided" industries intrigue economists and
incite regulators (December 2005)
http://www.economist.com/node/5278464
Journey beyond the stars: The brightest young economists are outgrowing their
discipline's traditional boundaries (December 1998).
http://www.economist.com/node/179915
From elsewhere on the internet:
Mr Tirole's university homepage
A full list of Mr Tirole's publications
A 54-page document from the Royal Swedish Academy of Sciences explaining why Mr
Tirole won this year's prize