Jean Tirole

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Contributions to economics

The science of taming powerful firms

• Competition is rarely perfect. Markets can fail and market power 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, 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. 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 or unfairly.
• * Regulators can gain insight into whether market power was fairly acquired by looking at how companies acquired their assets 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.
• * Secondly, regulators can force companies into a kind of fairness by offering options in how firms are contracted. A cost-plus contract shelters firms from fluctuations in costs but has a fixed rate of return, while a fixed price contract makes firms take responsibility for costs, but potentially offers a large windfall if costs can be minimised. However, with the latter there is the risk that firms will earn the windfall when costs turn out to be low for other reasons that have nothing to do with the efforts of the firm. An inefficient firm will prefer a cost-plus contract, and efficient firm will opt for a fixed price contract.
• ** However, the fixed price contract, in making the firm responsible for costs, incentivises skimping on quality. Powerful incentives to reduce prices must go hand in hand with more thorough monitoring of quality.
• ** The fixed price contract may also generate a high profit, which regulators may perceive via the information they now have. Regulators should not try to take these profits, even if encouraged by public opinion, as it destroys a firm's incentives to reduce costs.
• ** Thus, powerful incentives requires commitment and an independent regulatory agency protected from the pressure of public opinion.

  Intellectual Property as an example of monopoly issues in regulation

• In Intellectual property, regulators can lack information because ideas may take time to hit the ground and run.
• Technologies may require many different patents, and as the price of each patent stacks, the whole may become prohibitive to entities. One feature is patent pools, where patent owners lot their patents together for a discount, benefiting both patent users and intellectual property owners. However, patent pools, and more generally co-marketing, may also allow owners to raise prices. If two patent holders of similar patents collude to raise prices, there may be no lower-priced patent that performs the same function.
• Unfortunately, regulators don’t possess the relevant information to ban price-raising patent pools while allowing price-lowering ones. Simple approaches may be best:
• * ensuring that patents can be individually licensed outside the pool, ensures patents compete with the pool and thus only price-lowering pools survive.
• * Unbundling - where users can buy individual licences from the pool, not just the whole pool, and the pool price is the sum of individual licences.
• In many cases there are multiple routes to solving a technological problem, and each may be equally viable, however a standard-setting body may chose only one avenue to pursue. This may make some intellectual property a “standard essential patent” because users have to use that patent to meet the standard, and that patent can then ask for monopoly price.
• To restrain firms from taking advantage of this good fortune, standard setting committees require firms to agree in advance to license their patent on fair reasonable and non-discriminating terms. But what does “fair and reasonable rate” mean? People will not innovate without knowing what return they might get.
• Economists have proposed that intellectual property owners commit to licensing conditions prior to the choice of standard, but this doesn’t happen very often. Why?

  Two-sided Markets

• A two-sided market is where a central entity is beneficial to sellers and their buyers.
• The central platform will probably give a discount to the side that is most useful to the other side -- e.g. a social media platform might be free to users but charge advertisers, because the users are useful to the advertisers.
• This results in skewed pricing structures. One side may enjoy the central platform for free, while the other side is heavily charged.
• A regulator without a full understanding of two-sided markets might complain about predation on the low-price side or excessive pricing on the high price side, despite the fact such pricing structures are practised even by small firms.