Jean Marcel Pierre Tirole (French pronunciation: [ʒɑ̃ tiʁɔl]; born 9 August 1953) is a French economist who is currently a professor of economics at Toulouse 1 Capitole University. He focuses on industrial organization and game theory. In particular, he focuses on the regulation of economic activity in a way that does not hinder innovation while maintaining fair rules. Tirole's work is largely theoretical and explored in mathematical models, not empirical research.
In 2014, he received the Nobel Memorial Prize in Economic Sciences for his analysis of market power and regulation.
Tirole received engineering degrees from the École polytechnique in 1976, and from the École nationale des ponts et chaussées in 1978.
He was appointed a member of the elite Corps of Bridges, Waters and Forests, later completing graduate studies at Université Paris Dauphine; he received a DEA degree in 1976, and a Doctorat de troisième cycle in decision mathematics in 1978. He received a PhD in economics from the Massachusetts Institute of Technology in 1981, writing a thesis titled Essays in economic theory under the supervision of Eric Maskin.
He started thinking about studying economics when he was 21 years old, which he found both “very rigorous”, but at the same time “still a social science”. He said he found “a lot of that human aspect” in economics, which he found important.
Tirole is chairman of the board of the Jean-Jacques Laffont Foundation at the Toulouse School of Economics, and scientific director of the Industrial Economics Institute (IDEI) at Toulouse 1 University Capitole. After receiving his doctorate from MIT in 1981, he worked as a researcher at the École nationale des ponts et chaussées until 1984. From 1984–1991, he was a professor of economics at MIT. His work by 1988 helped to define modern industrial organization theory by organising and synthesising the main results of the game-theory revolution vis-à-vis understanding of non-competitive markets.
From 1994 to 1996 he was a professor of economics at the École Polytechnique. Tirole was involved with Jean-Jacques Laffont in the project of creating a new School of Economics in Toulouse. He is Engineer General of the Corps of Bridges, Waters and Forests, Chair of the Board of the Toulouse School of Economics, and a visiting professor at MIT, and has been a professor "cumulant" at the École des hautes études en sciences sociales since 1995.
He was president of the Econometric Society in 1998 and of the European Economic Association in 2001. Around this time, he was able to determine a way to calculate the optimal prices for the regulation of natural monopolies and wrote a number of articles about the regulation of capital markets—with a focus on the differential of control between decentralised lenders and the centralised control of bank management. Tirole has been a member of the Académie des Sciences morales et politiques since 2011, the Conseil d'Analyse Économique since 2008 and the Conseil stratégique de la recherché since 2013. In the early 2010s, he showed that banks generally tend to take short-term risks and recommended a change in quantitative easing towards a more quality-based market stimulation policy.
Tirole's textbook, The Theory of Industrial Organization, synthesised modern models of oligopolistic competition, analysing various cases where industries consist of a small number of firms with significant market power. He and Oliver Hart published a paper showing the conditions in which a vertical merger can result in foreclosure. Rochet and Tirole analysed the implications of 2-sided markets for competition policy. Fudenberg and Tirole also created a taxonomy of strategic effects in oligopolistic competition models.
The science of taming powerful firms
Tirole's 2014 Nobel Prize lecture was titled "The science of taming powerful firms" and explained his theories:
Competition is rarely perfect. Markets can fail and market power (firms’ ability to raise prices far above costs and/or offer low quality) must be kept in check. The number of companies in an industry only provides a rough indication of whether the market is competitive. As each industry is unique in how competition works, regulators should take a case-by-case approach. To enable this, economists should develop an in-depth analysis of an industry that accounts for what regulators do and don't know (creating policies that do not require information unlikely to be held by regulators), and join policy discussions. Policy makers, in turn, need to listen to economists.
Regulators must balance lowering prices for consumers with ensuring firms get a fair rate of return.
Monopolies in single-sided markets
If a regulator forces an upstream monopoly to give all downstream operators "fair access" to their assets/services at the same price, this "fairness" can lead to consumers paying more than they should for less than they deserve. While downstream entities may compete "on a level playing field", the competition "dissipates" the profits that can be extracted from consumers. This results in low prices, however, these low downstream profits effectively cap the ability of the upstream firm to make a profit from its assets/services. Without the "fair access" restriction, the upstream firm would probably make mutually beneficial deals with selected downstream entities (e.g. by preferentially selling some better service to a higher bidding downstream operator). Thus, the upstream firm could use its exclusivity to give itself market power and profit from its asset/services.
Whether the regulator tolerates preferential behaviour is a defacto regulation on the rate of return of the upstream asset/services.
When an entity holds a monopoly, whether it should be allowed by regulators to get the benefit of its market power depends on whether it has achieved its monopoly fairly (e.g. due to its own risk taking, investment, innovation or efficiency) or unfairly (e.g. by “political connections, wrong market design, or sheer luck”).
Regulators can gain insight into whether market power was fairly acquired by looking at how companies acquired their assets (e.g. bidding on an auction) and whether their profits are tied to their own innovation/efficiency or factors out of their control. Regulators can gain further insight, despite firms having more information than regulators, by collecting data and benchmarking companies against similar companies operating in different markets. Regulators can also gain insight by auctioning monopoly rights because in auctions, firms reveal information about industry costs by competing with one another.