French economist Jean Tirole, a student of imperfect markets, has spent decades dissecting the many industries where competition does not fulfill the textbook promise that prices will be low and quality will be high.
Tirole’s work has helped governments to improve cable television services, restrict credit card fees and crack down on monopolies.
On Monday, it won him the the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, or the Nobel Prize in Economics.
Tirole’s work has clarified “what sort of regulations do we want to put in place so large and mighty firms will act in society’s interest,” selection committee chairman Tore Ellingsen said after the announcement ceremony.
The choice of Tirole, a Toulouse School of Economics professor, comes after the 2008 financial crisis revealed shortcomings in the regulation of banks and other financial firms, and amid increasing scrutiny, particularly in Europe, about the market power of technology companies like Google Inc and Apple Inc.
It is also the second consecutive year that the committee has honored an economist whose work essentially assumes that markets are often inefficient, challenging a widely held view in academia long associated with the University of Chicago economics department.
“Jean Tirole, along with others, established a good theoretical foundation for the non-Chicago view of things that markets fail in various ways,” said John Kwoka, a professor of economics at Northeastern University in Boston who specializes in competition and regulation. “It’s important to think hard about the reasons that they fail and it’s important to think hard about the consequences.”
Monopolies or a few companies dominate many markets. They hold the power to keep prices artificially high, and they often lack incentives to innovate or improve quality. Cable and electric companies are ready examples in the US.
REGULATIONS
Economists have long recognized that government regulation of such markets could produce better outcomes for society.
Tirole, 61, is a pioneer in the application of mathematics, including game theory, to devising those rules. His work is largely theoretical, yet it has translated easily for practical use.
His work is also wide-ranging. A description of his influence published by the prize committee cited more than 60 papers, an unusually large number.
Tirole’s achievement was in “writing prolifically, thinking creatively, covering a lot of territory and adding important nuance in a lot of areas,” New York University economics professor Lawrence White said.
His work, beginning in the 1980s, was in part a response to the need for new rules as governments in Europe divested state monopolies, seeking to encourage investment and innovation, while preventing predatory profit margins.
Tirole did not offer a single set of new rules. Rather, he applied a set of general principles to the circumstances of each industry to suggest appropriate policies, often reflecting a nuanced balancing of costs and benefits.
University of Toronto economist Joshua Gans compared Tirole to Louis Pasteur as the rare example of a scientist whose work has both advanced the theoretical understanding of economics and directly affected daily life.
Gans pointed in particular to Tirole’s work on the deregulation of communications networks. Homes are generally connected to networks by a single line, owned by a single company. Governments seeking to foster competition can make that company sell access to its rivals. However, the price is crucial. Too high, and consumers see little competition. Too low, and the company itself is unable to serve customers at a profit. In effect, if a company sells both iron and goods made from iron, the question is how much it should charge for the iron.
BETTER MODEL?
The pricing model developed by Tirole and a now-deceased collaborator, Jean-Jacques Laffont, is the basis of current rules in Europe, New Zealand, Australia and other countries, but not the US. Gans said the difference explained why consumers in the countries with the rules generally enjoyed lower prices and better services.
“The alternative is what happens in the US, where Comcast doesn’t give access to its competitors, so Time Warner has to decide whether to build over the top of Comcast or just to stay out of their markets,” Gans said. “Had there been access regulation, maybe Time Warner and Comcast would be competing more directly.”
The US has taken Tirole’s work on antitrust enforcement more seriously. Beginning in the 1970s, many courts and regulators rejected the idea that companies could increase market power by purchasing their suppliers. A car company could not squeeze consumers by buying a parts maker, the theory went, because it still would face the same competition from other automakers.
Tirole’s work “successfully challenged” this view, the Nobel Prize committee said on Monday. He brought together evidence that such deals could have negative consequences and articulated a unifying theory that has proved influential.
“So now, when there is a major merger that involves important vertical relationships, the authorities take a more nuanced view,” said White, who served as chief economist of the antitrust division of the US Department of Justice in the early 1980s. “And we have Tirole, in part, to thank.”
White said a recent example came in 2011, when the US government conditioned Comcast’s acquisition of NBCUniversal on the terms of a deal that made NBCUniversal’s content available to Comcast’s rivals.
Tirole’s work also served as the basis for the EU’s regulation of credit card interchange fees, and it has informed investigations by European regulators of the pricing policies of technology companies.
“We owe Jean Tirole so much,” European commissioner for competition Joaquin Almunia said in a statement on Monday. Almunia has pressed investigations of Google’s market power, and of bank pricing practices.
However, Tirole has not always been an advocate of regulation. When Washington sued Visa and MasterCard in 1998 for preventing banks from issuing American Express cards, the companies cited Tirole’s work as showing that such membership conditions are beneficial. More recently he has defended “patent pools,” where owners of related patents bundle their work.
DOCTORATE
Tirole received a doctorate in economics from the Massachusetts Institute of Technology in 1981 and he taught at the institute for eight years before returning to France in the early 1990s. The economics school at Toulouse, which he helped found, is now a leading center for the study of regulation.
He was far ahead of most economists in advocating for increased financial regulation, including early work supporting easy access to funding for financial institutions during crises.
In an interview broadcast on Monday during the awards announcement, Tirole applauded recent efforts to impose liquidity regulations on financial companies, but warned that “banking is a very hard thing to regulate.”
Tirole said regulators needed to pay attention to the links between regulated financial firms like banks and unregulated financial companies.
“That is something we had forgotten or ignored before the crisis,” he said.
The Nobel Prize in Economics is the newest nobel, created in 1969 to celebrate the 300th anniversary of the Bank of Sweden, the world’s first central bank. It is the first time since 1999 that an American was not among the winners.
On the Nobel Prize Web site, Tirole said in a recorded interview that he had asked his 90-year-old mother to sit down before sharing the news.
He said he himself had needed about 30 minutes to recover.
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