Nobel Prize for Economics 2014: Jean Tirole – Market Power and Regulation

If anybody has been wondering why regulating energy is such a difficult and at the same fascinating thing: You may want to have a look at the 2014 Nobel Prize for Economics that just went to the French scientist Jean Tirole for his analysis of market power and regulation.

While lawyers are traditionally thought not to be too fond of numbers (“iudex non calculat”), this is obviously not true for those who deal with energy regulation. And this year, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel is clearly not only of interest for economists, but also for (energy) lawyers.

If you want to know why, have a longer look at the 54 page scientific background paper prepared by Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences on Jean Tirole’s  work on market power and regulation. Let me just quote from the beginning of the introduction of the scientific background paper:

“To what extent should the government intervene in the marketplace? Economists often consider fiercely competitive markets to be in the public interest. When producers in such markets strive to earn a profit, they are led — as if by an invisible hand — to deliver high quality at low cost. But many industries are not very competitive, and this lack of competition widens the scope for beneficial public intervention. Theories of regulation and competition policy aim to provide useful scientific guidance for such intervention. Clearly, any recommendations must rest on a sound understanding of how imperfectly competitive markets work. When a firm has market power, how will it behave? How does its behavior affect the firm’s suppliers, customers, and competitors? Questions like these are studied within the field of Industrial Organization (IO). …

The analytical revolution was to a large extent a collective effort but, among many contributors, Jean Tirole stands out. No other scholar has done more to enhance our understanding of IO in general, and of optimal policy interventions in particular.”

Of course, Tirole’s work included energy (and banks and telecoms). And looking at everything he has written, it is hardly surprising that energy regulation is still a challenge. But maybe the Nobel prize will bring some additional, beneficial further attention to this area of law.

Source: Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences

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