On A Tirole

John Cassidy explains the significance of Tirole’s work:

Taking tools of game theory and information economics developed in the postwar decades, he and his colleagues helped to change the way governments and economists think about an old subject that is becoming ever more important to our networked economy: the regulation of companies with monopoly power.

From Amazon’s battle with book publishers to Cablevision’s attempted takeover of Time Warner Cable and the European Commission’s investigation of Google, the issue of how to deal with companies that operate in markets where competition is restricted or absent has become front-page news around the world. Tirole and his colleagues, particularly the late Jean-Jacques Laffont, didn’t establish a set of hard-and-fast rules for governments to follow in individual cases. But they did create a unifying intellectual framework that regulators, aggrieved parties, and the companies themselves can draw on in thinking through the relevant issues.

Tyler Cowen calls it “an excellent and well-deserved pick”:

Overall I think of Tirole as in the tradition of French theorists starting with Cournot in 1838 (!) and Jules Dupuit in the 1840s, economics coming from a perspective with lots of math and maybe even some engineering.  I don’t know anything specific about his politics, but to my eye he reads very much like a French technocrat in terms of approach and orientation.

Justin Wolfers details how the “conclusions of Mr. Tirole’s style of analysis defy easy political characterization”:

In some cases they may call for a more vigorous regulatory response from government policy makers than is currently the norm, while in others, they call for greater restraint. In each case, the recommended policy depends on the details of the particular market, and in particular on what information is available; what contracts can be written; and how competitors, suppliers and customers are likely to respond.

In turn, this shows just how much Mr. Tirole’s work is a sophisticated mash-up of the three recent Nobel-winning themes that have revolutionized microeconomic theory. His research extends and applies the tools of game theory, which is used to analyze strategic interactions between firms and their competitors, suppliers, customers and regulators. It takes seriously the problem of imperfect information, analyzing how these interactions are shaped by what each of these players knows about the others. And he has been a pioneer within contract theory, assessing the consequences of the difficulty of writing contracts that fully specify the consequences of commercial transactions. This prize represents a vote of confidence in the direction of modern microeconomic theory.

Matt Yglesias highlights Tirole’s work on competition:

… I think many people will be most interested in his 2002 paper “Platform Competition in Two-Sided Markets,” co-authored with Jean-Charles Rochet. Among other things, the paper offers a powerful explanation of why so many leading internet companies — most prominently Google and Facebook — don’t charge for their products. In the most simplified thinking about business, a company has suppliers and then it has customers. But a platform market is two-sided. Apple sells iPhones to customers, but it also collects 30 percent of the gross sale price of apps in the app store. …

[W]hile it costs a lot of money to run Facebook it costs very little money to serve one more Facebook customer. The same is true for Google. Indexing the web is expensive. Paying engineers to work on the search algorithm is expensive. But serving one additional customer costs basically nothing.

Jordan Weissmann praises Tirole for his prescience:

Even in papers published decades ago, the subjects of his work feel ripped from today’s headlines—he was writing about the threat of too-big-to-fail banks and the hazards of bailouts all the way back in 1996. Want to talk about how to prevent another financial crisis, deal with Comcast, or think about the meaning of a monopoly in the era of free Internet services such as Google and Facebook? Triole’s your man, and has been for a long time. Yet he’s not a name you’re likely to see all the time in the New York Times or Wall Street Journal.

“Many of his papers show ‘it’s complicated,’ rather than presenting easily summarizable, intuitive solutions which make for good blog posts,” economist Tyler Cowen wrote in a summary of Tirole’s work. “That is one reason why his ideas do not show up so often in blogs and the popular press, but they nonetheless have been extremely influential in the economics profession.”

And David Spencer, who notes that he “do[es] not intend to criticise directly the award of this year’s prize to Jean Tirole,” uses the award as a starting point for a broader argument:

Academic economics is still stuck in an intellectual and ideological rut. Despite the global financial crisis – the worst in a lifetime – academic economists are more likely to win awards and the respect of their peers by producing abstruse models than by tackling and resolving real-world problems. The economics Nobel awards advances in economic analysis – meaning the development of formal models and the application of particular mathematical and statistical techniques. In essence, solving puzzles within economics matters more than dealing with grand societal challenges.

Thomas Piketty, who has done more than anyone else in the last year to bring academic economics to the public attention, had no real prospect of winning the prize, given his concern with the real-world issue of inequality. The non-award of the prize to Tony Atkinson – pioneer of inequality and poverty studies – can also be explained in the same way. But it should be a cause of concern, not least for members of the public tuning in to learn who has won the economics Nobel, that acute economic and social issues are not high on the agenda of academic economics.