And the ersatz Nobel goes to…


FTAlphaville explains:

The 2014 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has been awarded to Jean Tirole, a French professor of economics at the Toulouse School of Economics for his analysis of market power and regulation.

As the release from explains, Tirole’s contribution comes in figuring out the costs of information asymmetry and regulatory arbitrage :

Which activities should be conducted as public services and which should be left to private firms is a question that is always relevant. Many governments have opened up public monopolies to private stakeholders. This has applied to industries such as railways, highways, water, post and telecom- munications – but also to the provision of schooling and healthcare.

The experiences resulting from these privatizations have been mixed and it has often been more difficult than anticipated to get private firms to behave in the desired way. There are two main difficulties. First, many markets are dominated by a few firms that all influence prices, volumes and quality. Traditional economic theory does not deal with this case, known as an oligopoly, instead it presupposes a single monopoly or what is known as perfect competition.

The second difficulty is that the regulatory authority lacks information about the firms’ costs and the quality of the goods and services they deliver. This lack of knowledge often provides regulated firms with a natural advantage.

Then came the work of Tirole, who showed that it was wrong to assume that there was either perfect price competition or monopoly in private markets, and that price caps could provide dominant firms with strong motives to reduce costs – a good thing for society – but also permit excessive profits – a bad thing for society.

A good example comes in private sector cooperation on patents, which if enforced correctly can end up benefiting everyone, by allowing the cost of development to be recouped.

In that sense, Tirole’s work is especially relevant to the challenges being faced by today’s media industry, where near perfect competition driving prices below break-even cost rates, creating a race to zero driven by advertising subsidisation.

From the Nobel release:

Traditionally, undercutting prices has been disciplined under competition law, because setting prices below production costs is one way of getting rid of competitors. However, this is not necessarily true of all markets. Consider the newspaper market, for example, where giving away papers for free can be a way of attracting readers and thus new advertisers to cover the losses due to production and distribution. In this case, it is doubtful whether undercutting should be banned. Along with Jean-Charles Rochet, Tirole has increased our understanding of these platform markets where there is a strong link between players on different sides of a technical platform, such as readers and advertisers in the case of newspapers. Other examples of similar platforms are credit/debit cards, search engines, and social media.

More here.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the fouding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.


  1. GunnamattaMEMBER

    I think we can expect a lot more work on the functioning of oligopoly in markets which arent perfect (even suggesting they are efficient, or otherwise good for us), because that veritably is what we have – with multinational conglomerates usually arbitraging the difference in mobility between labour and capital (with labour essentially having low mobility and capital being the last word in fluid) as well as being generally capable of tax minimisation/avoidance on a scale not dreamed of a generation ago, and dominating international ‘trade’ growth (the rise of trade which is actually part of a conglomerate internal tax minimisation or production process).

    The weird thing about Australia is that the current policy settings would have us in the future as buyers of oligopoly products, but not really participating in either global production, design or logistics chains (except insofar as the products are coming to us)……leaving us with mining – where if we are doing well we might have a monopoly of sorts each generation – our banks – where the government guarantee protects them from international predation – and a range of light services [Education, Tourism and many business services in particular} which are spectacularly price sensitive and will never be in a position to generate lasting value for Australia.

    The prize continues a tradition of underplaying the role of monopoly/oligopoly finance capitalism though……the neocon agenda is to diminish all discussion of monopoly/oligopoly economics

    • migtronixMEMBER

      where the government guarantee protects them from international predation

      LOLwut? I believe you mean makes them prime for quantitative easing hording

    • Great post gunna.

      This is all particularly relevant for ‘straya since we host oligopolies in almost every market because of lack of scale.

      The fact that our policy makers are so addicted to pandering to vested interests and that the media keeps voters ignorant enough to entrench the that situation, is a real travesty.

      We’ll remain uncompetitive and inefficient for ever.

    • …which are spectacularly price sensitive and will never be in a position to generate lasting value for Australia

      Not sure i would agree with that – aren’t most tradeable goods in this basket.

      It comes down to how you define lasting, if you define it as large peices of infrastructure, the above is correct.

      If you define it as human capital, well, then the above becomes very debatable…

      • GunnamattaMEMBER

        Yep, reasonable point. I actually meant that services tend to be quite transportable as soon as a provider in one location becomes expensive.

        Most tradable goods involve a more susbtantial fixed plant cost which anchors them (to some extent) to a location and makes them more durable – and more difficult to bring back once they have gone.

      • yeah – definately agree with that sentiment.

        personally i think however that the fixed plant costs which previously anchored the tradeable industrial base is a declining reality.

        going forward i think the model is more shareable/dispersed costs infrastructre which acts as the fixed plant so to speak, and am perfectly happy to see same govt subsidised (to not would be crazy).

        arguably nothing i did in corp finance shows how to capture this nicely, but i’m basically a markets guys so…

        shame about the hash that both sides made of the nbn…

    • migtronixMEMBER

      Consider the newspaper market, for example, where giving away papers for free can be a way of attracting readers and thus new advertisers to cover the losses due to production and distribution. In this case, it is doubtful whether undercutting should be banned.

      ‘Murdoch supporter wins Nobel Prize’ more like.

      Oh yes lets totally allow a monopolist to further menace its competitors via dumping — wonder if China ever thought of that? …. idiot (not you BB that guy)…

  2. mine-otour in a china shop

    What happens when the regulation is done by public servants under the strong lead / direction of the private sector e.g. our regulatory system.

    Surely this is the worst case scenario – light touch captured regulation at the expense of the Australian taxpayer?

    If we really trust the big end of town that much just let them get on with it without the mirage of an overpaid regulatory system pointing to past glories as evidence of future success.