Antitrust Law Daily Wrap Up, INDUSTRY NEWS: Economist wins Nobel Prize for study of market power, regulation, (Oct 14, 2014)

By John W. Arden, J.D., LL.M.

French economist Jean Tirole has been awarded the 2014 Nobel Prize in Economic Sciences “for his analysis of market power and regulation,” clarifying how to understand and regulate industries with a few powerful firms. On October 13, the Royal Swedish Academy of Sciences announced the award to Tirole, who “breathed new life” into the study of market failures in industries dominated by a small number of monopolists or a single monopoly.

Left unregulated such markets often produce undesirable results, including prices higher than those motivated by costs and unproductive firms that survive by blocking the entry of new and more productive competitors, according to the Academy. Tirole’s analysis of firms with market power provides a unified theory with a strong bearing on central policy questions, such as how the government should regulate mergers, cartels, and monopolies.

Before Tirole, researchers and policy makers sought general principles for all industries, advocating 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, the Academy noted. “Tirole showed theoretically that such rules may work well in certain conditions, but do more harm than good in others.” For example, price caps may provide dominant firms with strong motivation to reduce costs, but may also permit excessive profits. Cooperation in setting prices 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,” the Academy stated. “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, government can better encourage powerful firms to become more productive and, at the same time, prevent them from harming competitors and customers.”

A professor of economics at the University of Toulouse, France, Tirole holds a PhD. in Economics from Massachusetts Institute of Technology (MIT), where he served on the faculty from 1984 through 1991 and remains a faculty affiliate in the Department of Economics. He received engineering degrees from the Ecole Polytechnique and the Ecole des Ponts and Chausees and a mathematics degree from Universite Paris Dauphine. He received his doctorate from MIT in 1981.

Further information regarding Tirole and his work appears on the Royal Swedish Academy website. The website includes a popular science background article as well as a scientific background article.

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