Current Events Economics - General

The 2014 Nobel Prize in Economics goes to…

Jean Tirole. The full scientific background is here.  Marginal Revolution has a number of posts or you can check out Wonk Blog.  Digitopoly discusses how Tirole is like Louis Pasteur.  Vox has a nice overview of Tirole’s work as well and an example from newspapers…

Newspapers, for example, are one area the Nobel Committee points to that illustrates this. They often give information away at a discount as a loss-leader to gain market share and increase advertising revenue. While a government might consider that illegal “predatory pricing” in some other context, such an approach doesn’t make sense in a press context.

Vox also has another example on platform markets, including a description why Google’s search technology is free.   An excerpt from the press release is below.

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.

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