Taming Monopolies

Editorial in The Hindu

It is usually not easy for laymen to appreciate the work that fetches the Nobel Prize in Economics or, for that matter, the relevance of such work in everyday life. It is not so this time, with the award going to French economist Jean Tirole, the second Frenchman to win a Nobel this year — the other being Patrick Modiano who got the Literature Nobel. Mr. Tirole’s body of work deals with the interesting and complex subject of regulating monopolies or, as a Nobel official put it so well, it is “about taming powerful firms”. The subject has immediate resonance in today’s world where government monopolies in areas such as electricity and transport are being dismantled and privatised and new monopolies are establishing themselves in sectors such as information technology and the Internet. Before Mr. Tirole came up with research using game theory and contract theory that aid regulation in situations of asymmetric information between regulators and the regulated, simple methods were used to regulate monopolies. Capping prices and prohibiting cooperation between competitors in the same market were two such methods used, but Mr. Tirole proved that they were not always effective and in some instances caused more harm than good. Price caps, for instance, can force dominant firms to cut costs, which is good but they could in the process lead to excessive profits for the firm, which is not so good.

Mr. Tirole published a paper in 2006 jointly with Jean-Charles Rochet that dealt with the interesting subject of “two-sided” markets that has direct relevance to today’s buzzing world of e-commerce. These markets bring together buyers and sellers on a platform they own, enable interaction between the two and charge both sides. Amazon and Flipkart are good examples. Or for that matter, taxi aggregator firms such as Ola Cabs or Uber. Mr. Tirole’s work showed that the platforms often favour one side to attract the other. For instance, deep discounts on e-commerce platforms are used to drag in buyers and in the process bring in more vendors who pay the platform for its services. Regulators often do not understand the practices due to asymmetry of information. Mr. Tirole’s work is also important in the context of today’s “Google-world” where the Internet giant strides like a colossus in the search domain and regulators are struggling to understand Google’s strategies and then figure out ways and means to regulate it. This year’s Economics Nobel is remarkable not just because it is the first time since 1999 that an American does not figure in it but also because the Committee has picked a work that has practical value.