Nobel Prize in Economic Sciences - 2014
“for his analysis of market power and regulation”
The science of taming powerful firms
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.
Jean Tirole, French citizen. Born 1953 in Troyes, France. Ph.D. 1981 from Massachusetts Institute of Technology, Cambridge, MA, USA. Scientific Director at Institut d’Économie Industrielle, Toulouse School of Economics, Toulouse 1 Capitole University, France.
Press Release: The Royal Swedish Academy of Sciences
This is a thought provoking, educative with lots of practical value and highly relevant article to Sri Lankan circumstances from 1977 up to date (2014) where highly regarded open economy principles are practiced blindly, insanely, passively, submissively and “surprisingly in extractive ways”. Highly controversial to the basics, mainly directed by monopolistic so called international & local business giants, those “elites & elite business leaders” basically stop new comers entering to the market, hamper the creativity at the grass root & obstruct the creative destruction and this has expanded the gap between the rich & the poor immensely during the past 30+ years and social unrest too. To become truly inclusive economically, socially and politically both governments and opposition political parties too and all stakeholders in development have a big role to play. Only inclusive unbiased institutions and policies at the same time stable strong but flexible institutions can deliver the goods!
ReplyDeleteOne good example for inclusiveness from the animal kingdom comes from gees! When they fly in the sky in “V” formation, they flap their wings, which create uplift for all even the weakest, change the leadership to train the youngsters to become better leaders and help each other! That’s why they can fly across the globe and oceans.
I would like to ask you, “Don’t these universally valid already tested – more than 1000s of years - basic life principles have a say in business, economics and development because we are not the last generation living in this planet and definitely it should not be like that!
- Sumudu Hewawasam (MDS/2014/16)
Sumudu, very good comment
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