Today’s Nobel Prize in Economics was awarded to Professor Jean Tirole for his work in industrial organization, and how to best regulate such industries that are dominated by powerful firms, like finance and technology. It’s an important recognition of this work, because the economics profession has long relegated industrial organization, and the study of oligiopolistic markets, to a theory that, sure, it exists in practice— but who cares about practice? Perfect competition, with the elegant supply and demand curves found in undergrad textbooks, still dominates the mainstream understanding of the economy (at least on this side of the Atlantic), and motivates the argument that regulation, and regulators, just need to get out of the way.
Tirole’s work instead recognized not only the need for regulation, but for a nuanced understanding of what a particular industry requires. He provides no easy answers as to how to best regulate oligopolistic and competitive markets. According to the Swedish Academy, he shows that “the best regulation or competition policy should therefore be carefully adapted to every industry’s specific conditions.“
While regulation is complicated, the independence of regulators shouldn’t be.
We assume that at the very least, regulators cannot simply defer to the interests of big firms. But there was plenty of discussion post- financial crisis that showed how bank regulators fell down on the job. And even the crisis doesn’t seem to have changed behavior: recently-released secret recordings by a former senior Federal Reserve bank examiner provide 46 hours of recordings on how bank still regulators work hard to please the very firms they are supposed to examine. The recordings “portray a New York Fed that is .. reluctant to push hard against Goldman and struggling to define its authority.” This is seven years after the financial crisis.
So, yes, within real-world oligopolies like finance, regulation must be carefully thought through and applied to meet the needs of diverse industries like finance and technology.
Tirole’s Nobel Prize will hopefully bring more attention to this critical area of work. And his work gives credibility to why regulation is a necessary part of a well-functioning market economy, especially in sectors where big firms dominate, and that complexity in how to best apply regulation should be embraced. But how regulators behave— i.e., that at the very least, they are supposed to do their job, and not defer to the industries they regulate— shouldn’t be complicated at all.