Jean Tirole

Nobel 2014 | Are regulated markets the secret to a successful and healthy economy?

As an economist, Jean Tirole’s research and regulation theories have changed how market regulation is applied to industries far and wide and broadened the scope of what competition can look like. He is a best-selling author, a distinguished professor and the recipient of a long list of prestigious awards. He is also humble. His work, and personality, have contributed not only to pushing economics forward as a field, but has worked on making it a more collaborative space, bringing in experts from different fields and reaching out to the public in a uniquely personal, relatable and authentic manner.

Jean Tirole

Jean Tirole

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, 2014

At a glance

Born: 1953, Troyes, France

Field: Microeconomics and industrial organization

Awarded: The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, 2014

Prize-winning work: For his analysis of market common good and regulation

A prize best shared: Tirole’s longtime colleague and Jean Jacques Laffont passed away before 2014, but it is thought the two would have been co-laureates

A champagne man: His hometown was once the capital of the Champagne region in France and it remains his drink of choice

Current focus for both research and fun: Digital dystopia or, what he calls, social science fiction

Leveling the playing field by regulated markets and competition 

When Tirole and his colleague Jean Jacques Laffont began their market regulation research in the 80s, he noticed a lot of areas where monopolies or tight oligopolies—markets controlled by a small number of firms—had formed. He found this troubling as it allowed them to raise prices or lower the quality without incurring a loss of customers, which makes sense where there are no competitors for customers to switchpowee to.

“It's very hard to define exactly what a monopoly or oligopoly is, but what we can do is to try to measure how much harm is done to society because of those high prices and this lack of innovation,” says Tirole. “So we need competition and that's really what my early research has been about is to try to introduce competition.”

They began looking at utility monopolies, including railroad, telecom and electricity companies with three main goals in mind. The first, how to introduce competitors. They found that while different industries face similar competitive challenges, they differed in many ways. Each industry warranted its own analysis.

In the railroad industry, you can’t simply duplicate tracks or stations. So it becomes about where competition can be introduced, for example in the production facilities that can compete amongst themselves. Competition requires innovation which in the long run, keeps companies on their toes, according to Tirole.

Incentive based regulations and other market regulation examples by Tirole

Their second goal was to create incentive regulation on a cost-plus basis. This means that if a company increases their price, then the regulator increases the cost to the consumer, allowing the firm to get a fair rate on return. Before Tirole and Laffont’s work if the costs for a company rose, they would simply raise their prices to consumers but never raise the quality of service to match those higher prices.

“What economists are worried about is abnormal profits,” he says. “We tolerate profits as long as they correspond to something which serves the consumer. If it doesn't serve the consumer, that's a different matter.”

They found that by making firms more accountable for their performance and efficiency, they could reduce their own costs. The cost reductions, some of which could be kept for the companies, could also be shared with consumer by lowering the prices.

And finally, they worked on asymmetric information, or incomplete information. One of the biggest issues for regulators is that they don’t often have the full cost information of a firm.

“It’s very important to reduce asymmetry of information for one thing, but it's also very important to realize areas of asymmetric information and act upon it to change your regulation,” says Tirole. “We tried to anticipate on the future reforms that were going to take place and tried to make sure that those reforms will be done in the right way. There is always asymmetric information but at least you can reduce the costs of this asymmetric information.”

This groundbreaking research and work are exactly the essence of what economics is all about according to Tirole, trying to regulate markets so as to make them better.

“This is an area where economics is quite powerful,” he says. “The independent agencies regulating these industries are made up of people who have been trained in economics and they absorb the ideas, modify them and make them better. This is an area where we can have some influence on what's going on.”

There is always asymmetric information but at least you can reduce the costs of this asymmetric information.

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The benefits of market regulation and competition

The importance of big tech regulation

While his early work was rooted in utility monopolies, Tirole’s work has stood the test of time and remains as relevant today as ever before. Many of the world’s largest technology firms have become monopolistic in nature. The main difference is simply the focus on innovation and its application. Tirole uses the booming market of ride share apps as an example.

“Whatever you think of these companies, that’s not the question,” he says. “The thing is that they have introduced very, very small innovations. Think about geo location, recording a credit card, sending you an invoice, ratings, the bottle of water and so on. Those are not big innovations, they existed elsewhere and yet no taxi monopoly had done that.”

Tirole sees the riskiness of tech as a regulation issue. He thinks that antitrust laws are the way forward, though they need to be more forward thinking. There are two types of antitrust laws today. The first focuses on monopolization and the second revolves around acquisitions. Acquisitions are a quick path to building a monopoly as tech companies have become known for acquiring their current, and even future, competitors.

“The first option is to go back to the old-style regulation,” says Tirole. “But I don't think it's feasible because those firms are global firms. It's almost impossible for a country to regulate a global firm.”

The US, the UK and parts of Europe have proposed that information be collected about the major tech firms and shared with antitrust agencies, including potential acquisitions, which would allow the agencies to intervene faster and potentially stop certain practices.

“That will require inverting the burden of proof so that if it's a merger, the firm will have to argue it’s a pro-competitive merger and not an anti-competitive merger,” he says. “That will be a different regulatory regime. It’s easier to prevent an acquisition than undoing the acquisition.”

The seven largest tech firms in the world are two-sided markets in which platforms have to attract two sides, the buyer and the sellers. In the case of the ride sharing apps, that means they must attract riders and drivers. This becomes an issue in monopolies because the two sides can both be exploited. Firms entering these markets must decide whether they want to please the consumer or the merchants, and the majority of tech companies choose the consumer.

“The consumer gets an incredibly good deal in this situation,” says Kremer. “They pay zero for great services, so you might say where is the competitive harm? If these companies are charging advertisers a lot for these free services, the cost of doing business raises and prices raise. In the end, the consumer is going to pay indirectly because the advertisers are paying more.”

Tirole says this becomes dangerous when charging higher prices also leads these powerful platforms to infringe on our privacy, engage in politics and effect the future of labor.

“It all depends on a regulation,” he says. “We all know that we have a bright future. If we do things right, we'll be much healthier and much wealthier.”

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We all know that we have a bright future. If we do things right, we'll be much healthier and much wealthier.

The inequality of big tech

The urgent need for a global climate action plan

One of the issues that worries Tirole most today, like many others, is the climate and our inability to act. While he sees the good intentions behind global conventions to address climate change, he thinks that most meetings are reduced to exactly that, a list of good intentions rather than action.

“If you read the Paris agreement of 2015, it’s very similar to what was written in Rio in 1992,” he says. “This negotiation in 2015 wasn’t an easy one but it’s nice at least to get 196 countries saying we should be doing something, that’s already progress. But in the end, you need to have a strategy to force countries to come to the bargaining table and actually say we are going to spend money on fighting climate change, whereas everybody went back home and saying, ‘Oh everything will be fine.’”

Part of the problem according to Tirole is a political one. Other environmental problems in the past have been solved by pricing things, and he’s sure that putting a price on carbon would take us on a more positive trajectory.

“We have a bigger responsibility toward our children and grandchildren,” he says. “We do a lot of greenwashing. We talk about the environment all the time, but we do very little and there are solutions. Economists do have solutions.”

Because solving the problem is a global issue, Tirole worries that each country would like the other countries to put in the effort. A single country that reduces emissions will get maybe one percent of the benefit while baring 100 percent of the cost, and this defers action and political will.

“We need cleaner energy, we need to emit less carbon,” he says. “We must make sacrifices, not huge ones, but the sacrifices will only become bigger. It’s dangerous to think we can wait more year because it’s one more year, then one more year, and then it’s 30 years, 40 years. It's this accumulation of decades of inactivity which is the dangerous part.”

“In the end, you need to have an international agreement because who wins?” he asks. “Who wins is the entire mankind.”

What needs to change to solve climate change?

We talk about the environment all the time, but we do very little. There are solutions. Economists do have solutions.

Economics for the Common Good

Tirole had been an economist for over three decades before he reached what he refers to as a tipping point. Up until that time, he had been engaged in policymaking, working with experts in academia, government, regulatory agencies, and in business.
Having his life’s work recognized with the most prestigious prize in economics, suddenly people stopped him the streets wanting to know more about his work, but have it explained in a way they could understand.

It all came at a particular poignant time as 2016 marked a growing wave in populism and a large number of people began to distrust the experts.

“It’s not only true in economics, it's true in medicine, it's true in biology, it’s true in climate science in the U.S. and so on,” he says. “In many areas, the experts are disregarded. And that's too bad. A democracy cannot function unless there is some kind of knowledge and sharing of knowledge. We have a duty to share our knowledge not only with experts but also with the people in general.”

This realization led him to write the book Economics for the Common Good, to explain the science, the pros and cons, and what has been learned from the past. To show how economics can be applied in all facets of life and how it can be used as a force for good. As Tirole discovered, it’s much harder to write a book for masses then to teach or give a seminar.

He tells a story of his mother, who he describes as clever today as she ever was. Having been a professor of French, Latin and Greek, she has always been someone who loves and respects the importance of knowledge. At 90 years old, she was interviewed by media after Tirole was awarded the prize.

“The journalist said, ‘Your son must be a genius,’ and she said ‘Are you kidding, my son a genius? No, he’s not a genius.’ And I thought that was just the right answer,” he says with a smile. “There are no geniuses.”

“There are people who have more motivation, they are well-trained, they meet the right people in the right environment, at least that was the case for me,” he says. “I was not an exceptional person. I had some talents for sure, but I love my work.”

Tirole also created the Institute for Advanced Study in Toulouse, which is a disciplinary institute that includes psychologists, sociologists, political scientists, historians, biologists and so on, all working with economists.

“That’s my view of economics,” he says. “It’s a collaboration and some kind of unification is very important. I don’t like ivory tower theory or empirical work which is completely disconnected from theory. You need both.”

Continuing to push economics forward as a unified field is work Tirole has no intention of ending any time soon.

“If you have something you love, you will do it well and if you do it well that will give you some meaning for your work life,” he says. “And that's very, very important.”

We have a duty to share our knowledge, not only with experts but also with the people in general.

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Hear Michael Spence's view on how countries can grow sustainably while having a long-lasting positive impact.

UBS Nobel Perspectives Webinar Series

Jean Tirole joined featured in our Nobel Perspectives webinar series. He joined Massimiliano Castelli, Head of Global Strategy and Global Sovereign Markets, in a webinar to discuss the implications of COVID-19 on topics including technology, globalization and sustainability.

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