Earlier this month, the Royal Swedish Academy of Sciences awarded the Nobel Prize in Economic Sciences for 2014 to Jean Tirole of Toulouse University “for his analysis of market power and regulation”.
If you have never heard of Jean Tirole, start by staying on topic and honor the scientific method: do some research; if you digit his name on Google, nearly 2 million results appear in about a second. Tirole’s CV is… long. If you have a slow internet connection, do not try to download it; if you have an antiquated printer, do not attempt to print it. In the past 25 years, Tirole has published about 150 papers in English and numerous others in French; he has written about 10 books and many of them are already classics.
Jean Tirole was awarded the Nobel Prize for his contribution on how to understand and regulate industries with a few powerful firms. This case is known as oligopoly and creates two main difficulties: firstly, these firms end up influencing fundamental variables such as price, quantity and quality. Secondly, the regulatory authority lacks information about the firms’ cost structures and quality standards (we will call this problem asymmetric information).
So far, governments’ regulatory policies typically involve price caps for monopolists. But the asymmetric information problem makes it virtually impossible to establish what the optimal price for a good or service is and this is why regulation often creates socially undesirable outcomes.
Jean Tirole ’s research, which builds upon game theory and contract theory, demonstrated how the regulatory authority can solve the asymmetric information dilemma by allowing firms to choose from a menu of ingeniously constructed contracts. Given that the firm has perfect information about itself, it will make its decision optimally. The idea is that there are no simple, standard solutions for regulation.
Consider the newspaper market: even though undercutting prices (setting prices below production costs) has been disciplined under competition law, giving away papers for free can be an effective way of promoting information, attracting readers and thus new advertisers to cover potential production and distribution losses. Should undercutting be banned in this case? It is at least doubtful. These platform markets, where there is a strong link between players on different sides of a technical platform (other examples are search engines and social media) have been a key topic in Jean Tirole ’s research.
Jean Tirole ’s contribution on market power and regulation is immense; but the spectrum of his work is not less extraordinary. Jean Tirole ’s study on incentives and prosocial behavior investigates the complex concept of generosity and why people engage in costly, low individual-benefit activities, from volunteering to donating blood and helping elderly ladies on pedestrian crossings.
Studies on incentive devices found that if a monetary reward is offered to blood donors, donations decrease. Most of the times, prosocial behavior has nothing to do with altruism; there is evidence that we try to “buy” social prestige and self-esteem. There is also evidence that on average you would be more likely to help the elderly lady crossing the street if I am watching you. This is an example of social signalling: we want to show how generous we are and we want to feel good about ourselves.
After receiving the Nobel Prize, Jean Tirole admitted: “I still haven’t recouped yet”. After all, as the American astrophysicist Saul Perlmutter puts it: “Nobody really expects a Nobel Prize call”.