Regulation and the Nobel Prize in economics

Jean Tirole Image copyright AP

Regulation is not the flashiest subject, but the highest prize in economics has been awarded to Jean Tirole of the University of Toulouse for his work that has deepened our understanding as to how to regulate powerful firms.

When I was a graduate student in economics, one of the primary texts was Jean Tirole's - The Theory of Industrial Organisation. I pulled it off the shelf again when Tirole was announced as the latest recipient of the economics Nobel Prize.

It's a timely reminder that he has advanced this microeconomic field, which is very relevant to current policy debates over how to improve the way that banks are run and how monopolies should be regulated to benefit consumers facing high energy prices.

Firstly, industrial organisation (IO) is a field that seeks to understand the complexity of how firms operate and then how to regulate them.

Needless to say, in the post-global financial crisis world, regulating banks and other big companies has come to the forefront of policy.

IO provides the framework to analyse how firms are set up, how markets operate, and what drives the dynamics of competition, such as when information is imperfect or there are entry barriers.

The influence of government regulation is also part of what shapes a market, and IO examines how government and markets interact.

It won't be news to most of us that most markets are not perfectly competitive and are not full of firms offering identical goods.

In fact, there are a lot of markets with varying degrees of imperfection and they can be dominated by a few powerful firms which in turn influence prices. The upshot is that consumers can end up paying more. For instance, monopolies and oligopolies, in which a few firms dominate an industry, are prime examples.

In these markets, regulation certainly matters. But, how to effectively regulate to promote competition and protect consumers depends on the dynamics of the particular market.

For instance, energy companies that provide a public good would be regulated differently than say an internet firm.

Tirole's research offers rigorous theory that is replete with empirical applications. His papers have examined market dynamics that are relevant to regulating dominant players such as Google and global banks.

Like most Nobel laureates, his publications span a large number of other areas.

But, his work on how to regulate big firms to promote competition and limit harm to consumers is why he has won the most prestigious prize in economics.

And it is timely.