Idea That Won 2014 Nobel Prize for Economics


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

French economist Jean Tirole won the 2014 Nobel Prize for economics for his work that has shed light on how governments should regulate powerful companies that dominate markets.
The economist will receive an 8 million Swedish crown ($1.1 million) prize. The economics prize, officially called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, was established in 1968. It was not part of the original group of awards set out in 1895 will of Nobel, the inventor of dynamite.
Mr. Tirole, French citizen. Was 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. Tirole has covered a wide range of areas including pay, the banking industry and credit card fees. He is known for his collaboration with the late Jean-Jacques Laffont.
The Science of Taming Powerful Firms
Jean Tirole’s research showed that market regulations should be carefully adapted to the conditions of specific industries, rather than general regulations such as price caps which can do more harm than good. Left unregulated, industries that are dominated by a few single firms can produce undesirable results, such as unnecessarily high prices or unproductive companies blocking new firms from entering the market.
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.
 

Wednesday, 31st Dec 2014, 07:26:43 PM

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