Market Power and Regulation - Jean Tirole - Essay Example

Jean Tirole Jean Tirole Jean Tirole was born in 1953) in France; he an economics who focuses on game theory, industrial organization, psychology and economics, and banking and finance. He was awarded a Nobel Prize in Economics in 2014 for his analysis of regulation and market power. He has published over 200 professional articles in the finance and economics field, including The Theory of Corporate Finance, Game Theory, A Theory of Incentives in Procurement and Regulation, Competition in Telecommunications, The Theory of Industrial Organization, and Financial Crises (Sappington & Armstrong, Handbook in Industrial Organization, 2010). Market Power and Regulation Most of the economists frequently regard fiercely competitive markets as the public interest. When the producers in the said markets fight to earn a profit or gains, they are guided, as if by an invisible hand, in delivering high quality at the lowest cost possible. But most the industries are not competitive, and due to the lack of competition, there is the need for intervention the public’s interest. Competition policies and theories of regulation are aimed at providing useful scientific guidance in such interventions. Stigler George was awarded a Prize in Economic Sciences in 1982 “for his seminal studies in functioning of markets, industrial structures, and the causes and effects of public regulations”; however the study did not cater for the rapidly developing, revolutionary, industrial organization (IO) field. Jean Tirole is the best among the contributors to the analytical revolution; he has enhanced the understanding of the IO in general, and particularly the optimal policy interventions. The theoretical advancements, by Tirole, are in line with great public-policy interest, for example, in the 1980s and 1990s most of the countries pursued pro-competitive liberalization and regulatory reforms. The European Union (EU) came up with a single market; new issues sprung and could not be fruitfully analyzed with the existing theories, Stigler George, and others; the EU analysis required synchronization of the oligopoly theory contract theory, the principal-agent, with combination of industrial economics combined with public economics. Jean Tirole’s expertise covered all the above fields, hence was ideally positioned at making a lasting contribution (Tirole & Lerner, 2013). Tirole created a synchronized framework used in regulation and IO theory, based on a thorough analysis of information and strategic behavior economics. He consistently extracted his results from the fundamental assumptions about technologies such as contracting technologies, preferences, and information asymmetries, abstaining from convenient but explicit assumptions that previously seemed essential making any analytical headway in the field of economics. From the beginning, Tirole’s analytical approach entailed unusual technical experience, especially in the rapidly changing fields of contract theory and game theory. Tirole’s Noble prize emphasized on his creative application of the above analytical tools in IO and regulation theory (Farhi & Tirole, Systemic Bailouts, Maturity Mismatch, and Collective Moral Hazard, 2012). Tirole’s hard work has facilitated realism. The division of labor in the scientific community encourages more theorists in specializing in their fields as to understand the logic of new models, paving way for the challenging jobs to be confronted by the models with realism to the advanced applied scientists. From this, theoretical work mostly seems detached from “relevant practice” and “the real world”. In contrast, Tirole carefully came up with his models in order capture salient features of particular economic environments, and highlighting essential mechanisms that existing or previous applied research had either failed or ignored to describe with sufficient precision. Tirole availed order in the unwieldy literature; via enforcement of consistent conceptual frameworks over the wide range of issues or problems, he was the first person that created a framework encompassing the coherent theory of IO. Tirole’s theoretical models have sharpened and illuminated policy analysis. By focusing on fundamental features that produce divergence between public and private interests, he effectively managed to illustrate the optimal regulation in specified industries. Mostly, his rigorous thinking and wisdom have overturned the previous existing conventional wisdom. For instance, he was capable of challenging the once prevalent views and beliefs that monopoly powers in the single market could not profitably leveraged into another market via vertical integration. Consequently, competition bodies or authorities are more alert to the demerits posed by restraints and vertical integration. Tiroles theories have shown proof for public interventions frequently reduce the problems of credible commitments and information asymmetries (Tirole & Lerner, 2013). Although the motivation for the 2014 Noble prize focused on normative principles applied in competition and optimal regulation policy, any normative theory has to rest on the positive analysis of the firms’ interactions. For regulation and competition policy, it is important to acknowledge interactions in the imperfectly competitive markets. Hence, oligopoly theory is the main central topic in IO discussion; Jean Tirole played a critical role in transforming the oligopoly theory in the 1980’s. Among his contributions towards the field include; his work on R&D races and strategic investments with Drew Fudenberg and others, works on dynamic oligopoly with Eric Maskin and works on co-marketing with Josh Lerner. His theoretical advances have transformed the way economists think particularly on competition policy. Tirole convincingly analyzed the public policies in Regard to vertical contractual relationships. He proved that vertical relationships required regulation if they imposed costs on outsiders that were greater as compared to the benefits to insiders. Therefore, a crucial element in the analysis was the specific understanding of mutually profiteering contracts between buyers and sellers in a vertical chain; the problem that closely resembled that of the optimal regulation in monopolies. Another vital element was to understand and acknowledge the characteristics of strategic behavior towards competitors. Tirole’s analysis on vertical contractual relationships gained academic acknowledgment quickly and has greatly contributed towards the revision of competition policies, particularly in the United States. Tirole did not only developed theoretical frameworks utilized in analysis, but also modified them to the circumstances of quite different and particular industries; he contributed: general economic theory, asset-market bubbles, financial markets, organization economics, behavioral economics, and corporate finance. Other Works Jean Tirole also made seminal efforts and contributions to other fields, which are outside of IO and regulation. Tirole’s researches include game-theoretic solution concepts; the work on the Markov Perfect Equilibrium was excellent. He further worked on the Perfect Bayesian Equilibrium (PBE). Tirole and Fudenberg in 1983 researched on a two-person and extensive-form bargaining game without complete information. In the games, player’s actions would convey information about their type, and it is not how opponent would react to an out-of-equilibrium action. Through the application of the concept of PBE, Tirole and Fudenberg were able to see how exogenous factors and parameters, for example, the bargaining costs influenced the bargaining breakdowns and probability of concessions (Sappington & Armstrong, Handbook in Industrial Organization, 2010). References Evans, D. (2009). OECD Policies: Two-Sided Markets. COMP/DAF. Farhi, F. E., & Tirole, J. (2012). Systemic Bailouts, Maturity Mismatch, and Collective Moral Hazard. American Economic Review, pp. 59-92. Sappington, D., & Armstrong, D. (2010). Handbook of Industrial Organization. In D. Sappington, D. Armstrong, & R. Porter (Ed.), Developments in Regulation Theory (Vol. 4, p. 302). New York: Elsevier. Tirole, J., & Lerner, J. (2013, November 4). IDEI Paper. Essential Patents(803). Read More