French economics professor Jean Tirole of the University of Toulouse won the 2014 Nobel Prize in economics this week for his work on the thorny issue of government regulation of monopolies and oligopolies (when there are a few large players with a lot of market power), the threats they pose to consumers, and policies for curbing abuses.
“This year’s prize in economic sciences is about taming powerful firms,” noted Staffan Normark, the permanent secretary for the Royal Swedish Academy of Sciences that awarded the prize.
Many reports point out that Tirole’s work avoided the traps of simplicity that had limited the effectiveness of most other research in this area. The Academy press release noted that most other models apply a single solution across industries, “such as capping prices for monopolists and prohibiting cooperation between competitors.” Yet, price caps can motivate firms to reduce costs – a good thing – but also allow for “excessive profits – a bad thing for society.” Another dilemma: “The merger of a firm and its supplier may encourage innovation but may also distort competition.”
Tirole in his research bypassed these inherent contradictions. He showed that corporate competition rules can work well when they are tailored to an individual industry’s unique traits rather than being applied in a standard way across all industries.
According to Wharton management professor Mauro Guillen, Tirole has had a “huge impact theoretically and also in terms of policymaking. Antitrust authorities have used his pricing model for oligopolistic goods and services when it comes to formulating regulation, especially in the telecommunications industry.” He adds that Tirole also “has shown that markets often ‘fail’ to perform well, contrary to the Chicago view Twitter , and that government regulation is needed to help them allocate resources in efficient ways that benefit the consumer.”
Tirole has had a “huge impact theoretically and also in terms of policymaking.” –Mauro Guillen
Several sources note that Tirole’s career has involved many landmark studies over a vast breadth of important topics. But the Nobel Prize focused on just a few areas of his work, including monopoly and oligopoly regulation, game theory, contract theory and industrial organization.
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Esther Gal-Or, professor of marketing and business economics at the University of Pittsburgh, notes that Tirole’s research on monopolies is especially relevant now because “regulation is a hot topic…. We are living in a world where we have monopolies … that are revolutionizing processes and bringing products in that are changing the entire model, [like] Google and Apple. They have acquired significant market power … and they are attracting a lot of attention [by regulators].” (Gal-Or offered her thoughts about Tirole’s work on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. Listen to the podcast at the top of this page.)
“The Nobel committee rewards academics for a specific contribution, but the cited work is rarely [their] sole contribution,” says Pinar Yildirim, a Wharton marketing professor. “And if you ask others, sometimes the cited work may not even be the most influential. There are no Nobel laureates who have had a single contribution followed up by low productivity. Most of these scholars have a lifetime achievement and inspire the work of others.”
A Huge Body of Work
Mint, a business daily in India, also points out that the Academy chose to make the award based on a relatively narrow sliver of Tirole’s body of work. “Tirole is much more than that: He belongs among a handful of economists who have written phenomenal papers in almost all reaches of microeconomics and formal political economy.”
Says Yildirim: “There are very few comparable economists who may have written about as wide a variety of subjects. From regulation to platform economics, two-sided markets, political economy to behavioral topics such as self-control, beliefs and irrationality, he [has written] on … subjects in a way that reached a large audience in and out of economics. And he — along with his co-authors — was often the first economist to take interest in these subjects.”
“The Nobel committee rewards academics for a specific contribution, but the cited work is rarely [their] sole contribution.” –Pinar Yildirim
Yildirim adds that “Tirole is an economic theorist; he almost never touches data or empirical work. Many other theorists like him have been awarded the Nobel prize. In my opinion, you can be equally influential whether you use only the tool of analytical modeling or add data to it.”
Nevertheless, the Academy noted that Tirole’s work has “facilitated realism,” while the work of many other economists presumes that markets are perfectly competitive. Tirole’s models deal with the world of business as it is practiced every day — where sorting out a motive for actions gets messy. His work offers guidelines on how to get things done in the real world. The Academy further pointed out that “Tirole’s models have sharpened policy analysis. Focusing on the fundamental features that generate a divergence between private and public interests, Tirole has managed to characterize the optimal regulation of specific industries.”
In one example of the practical implications of Tirole’s research, the Washington Post cited the defense industry as an oligopoly where it is difficult for the government to distinguish fair pricing from gouging. That’s because the typical defense company has all of the production or service information – a one-sided affair academics call the problem of asymmetric information. In practice, the government and the defense contractor will agree on a contract price, but cost overruns are extremely common, and the government typically has little choice but to pay additional amounts because there are so few service providers to choose from.
According to the Post, “Tirole showed that, sometimes, the government can do better if it offers companies a choice of contracts. This forces firms, at least indirectly, to reveal whether they have high or low costs, since different contracts will be better for them depending on that.”
Meanwhile, back in his home country, “a very limited number of people knew of Jean Tirole,” says Stephane Marchand, chief editor of Paris Tech Review. “Contrary to many big-shot economists, he is very shy and had limited exposure in the media. Tirole’s research has been very important in shaping anti-trust regulation in Brussels. He was more influential on the European stage than in France. He has been advocating that labor markets in France are in a catastrophic stage of decay – we have the highest rate of unemployment for young people and for seniors aged above 50. It is ironic that one of Tirole’s specialties is industrial economics – how to organize your industry so that it offers a strong defense against attacks from abroad. During the past 30 years, France has lost close to 30% of its industrial production — with huge consequences for jobs.”