Tirole's Industrial Regulation and Organization Legacy in Economics

• DOI: http://doi.org/10.1111/sjoe.12117
• Published date: 01 July 2015
• Date: 01 July 2015
• Author: Drew Fudenberg

Scand. J. of Economics 117(3), 771–800, 2015

DOI: 10.1111/sjoe.12117

Tirole’s Industrial Regulation and

Organization Legacy in Economics∗

Drew Fudenberg

Harvard University, Cambridge MA 02138, USA

drew.fudenberg@gmail.com

Abstract

Jean Tirole was awarded the 2014 Sveriges Riksbank Prize in Economic Sciences in Memory

of Alfred Nobel for his analysis of market power and regulation. This paper provides an

overview of some of that work, and of his related contributions to game theory.

Keywords: Game theory; industrial organization; mechanism design; oligopoly theory;

patents; platform competition; regulation

JEL classification:C72; C73; D21; D42; D43; D82; K21; L12; L13; L41; L42

I. Introduction

“Je suis un chercheur; je ne suis pas capable de parler de tout et n’importe

quoi.”1

Jean Tirole was awarded the 2014 Sveriges Riksbank Prize in Economic

Sciences in Memory of Alfred Nobel for his analysis of market power and

regulation. In this paper, I try to convey the main ideas of that work, along

with some of Jean’s positive and methodological contributions to the study

of imperfect competition and its implications for industrial organization.

This narrow focus emphasizes my connections with Jean, and leaves out

his many important contributions in such fields as asset pricing, behav-

ioral economics, and organizational economics, which on their own would

constitute a stellar career, as well as his arguably Nobel-level work on

banking and corporate finance.2Jean’s phenomenal energy and breadth are

reflected in the fact that he has distinct and influential collaborations with

∗I thank Glenn Ellison, Mira Frick, Ryota Iijima, Eric Maskin, Lones Smith, Patrick Rey,

Jean-Charles Rochet, Al Roth, Nathalie Tirole, and Jean Tirole for helpful comments. NSF

grant SES-1258665 provided financial support.

1Jean explaining why he will not offer opinions on arbitrary topics: “I am a researcher,

and not able to talk about everything and anything.” (See http://www.canalplus.fr/c-divertisse

ment/c-le-petit-journal/pid7560-vu.html?vid=1148121.) While quite a reasonable position,

Jean’s areas of competence are much larger than those of most economists I know.

2For a broader and more detailed overview of Jean’s work, see the excellent scientific report

compiled by the Economic Sciences Prize Committee (Royal Swedish Academy of Sciences,

2014); I relied on it extensively when writing this paper. Another sign of what this paper

CThe editors of The Scandinavian Journal of Economics 2015.

772 Tirole’s industrial regulation and organization legacy in economics

each of Philippe Aghion, Roland Benabou, Mathias Dewatripont, Oliver

Hart, Bengt Holmstrom, Paul Joskow, Jean-Jacques Laffont, Josh Lerner,

Eric Maskin, Patrick Rey, and Jean-Charles Rochet. Any of them could

have been asked to write this paper, and each would have their own take

on Jean’s story; I would like to share a little of my own.

I first met Jean in 1978 when we both started graduate school at

Massachusetts Institute of Technology. At the time, theorists such as

Dasgupta, Dixit, Spence, and Stiglitz were exploring the implications of

dynamic issues, such as commitment and timing for such industrial organi-

zation topics as patent races and preemptive investment.3Simultaneously,

game theorists were developing tools that seemed natural for studying these

problems, such as sequential equilibrium (Kreps and Wilson, 1982), and

showing how to use formal game theoretic models to study dynamic com-

petition, as in Milgrom and Roberts (1982) on limit pricing. Neither game

theory nor mechanism design was then a standard part of the economics

curriculum, but Eric Maskin taught an advanced class on these topics.4

Just as important, Eric spent a lot of additional time with us in a read-

ing class where we read a number of soon-to-be classic papers, including

all of the game theory papers mentioned above. Jean’s attraction to game

theory, and particularly dynamic games, was quick to take root. During

graduate school, he analyzed the strategic aspects of capacity expansion,

learning-by-doing, and bargaining with incomplete information (Fudenberg

and Tirole, 1983a,b,c), and began working on the dynamic oligopoly mod-

els that became Maskin and Tirole (1987, 1988a,b).5

Since then, Jean has been a leader in applying game theory and mech-

anism design to analyze how firms set prices, make investment decisions,

etc., and how to design rules and regulations that lead to better out-

comes. As the Nobel committee noted, “No other scholar has done more

to enhance our understanding of industrial organization in general, and

of optimal policy interventions in particular.” He did this by identifying

important economic problems, developing and extending the appropriate

game theoretic tools, and applying them to derive important conclusions

leaves out is the fact that the 2015 Nemmers Prize conference in his honor, “Liquidity,

Bubbles, and Crises”, focused on Jean’s work on banking and financial markets as opposed

to my focus on regulation and industrial organization.

3See, for example, Spence (1977) and Dixit (1980) on strategic capacity expansion, and

Dasgupta and Stiglitz (1980) on patent races.

4The syllabus for the class was the minmax theorem, Nash equilibrium (including existence

in discontinuous games, and applications to implementation theory), the core, Shapley value,

bargaining set, and other cooperative solution concepts.

5In addition to all of this, Jean found time to write a paper on the impossibility of speculation

with rational expectations (Tirole, 1982) and a paper on fixed-price equilibria (Maskin and

Tirole, 1984).

CThe editors of The Scandinavian Journal of Economics 2015.