By Jack Peat, Editor of The London Economic
There are very few big industries in existence today that are not overrun by big companies. Take a minute to count how many rail operators there are in the UK or mobile phone companies, banks or electricity firms and you’ll struggle to move past your first five fingers. In a world where corporate capitalism is allowed to run riot, understanding how to keep big firms in check has become of paramount importance.
French economist Jean Tirole has today been awarded the Nobel Prize for Economics for his work in designing crucial policies across a number of industries that apply specifically to big companies. This year’s prize was focused on “taming powerful firms” which meant that Tirole, despite still being relatively unknown in the world of economics, was in good stead to win the award for his contributions on how to understand and regulate industries with a few big firms. The Royal Swedish Academy of Sciences said “his work has made him one of the most influential economists of our time” with “theoretical research contributions in a number of areas”.
Tirole is the scientific director of industrial economics at Toulouse University. He first came to prominence after his book, Theory of Corporate Finance, was given an award for excellence by the Association of American Publishers. After receiving his PhD from MIT in 1981 Tirole worked as a researcher at l’École nationale des ponts et chaussées until 1984 before working as a Professor of Economics at MIT where he is still affiliated. He has worked on several publications, most notably The Theory of Industrial Organization, Game Theory (with Drew Fudenberg), A Theory of Incentives in Procurement and Regulation (with Jean-Jacques Laffont) and The Prudential Regulation of Banks (with Mathias Dewatripont).
The Academy said: “From the mid-1980s and onwards, Jean Tirole has breathed new life into research on 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, the Academy said. “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.”