When Regulation Isn’t Bad, Because It Usually Is (Lit Review)

March 18, 2015

Who

The Royal Swedish Academy of Sciences

What

The Prize in Economic Sciences 2014

Where

PDF Document

When

2014

The Gist

Jean Tirole is a Ph.D. economist who won a Nobel Prize in 2014 for excellent economic analysis
He proposes solutions for asymmetrical information and monopoly/oligopoly problems facing many markets
Most brilliantly, he proposes that regulation should be tailored to specific markets, because every market has unique conditions for the most competition

The Good

Tirole’s proposal of regulating is actually sane, which can’t be said for much of the blanket regulation the government is involved with
Practical examples make it easier to understand the more advanced economic concepts explored in the paper
Extensively covers oligopolies, which are an all-too-common shell of what competition could be in the USA

The Bad

Contains many economic terms, the contextual meaning of which isn’t always obvious; could use a mini-glossary
While the examples are great, the paper doesn’t drop names of firms…why?
Needs more illustrations in the style of the Monopoly drawing at the beginning

The Questions

The paper focuses on regulation in monopolistic/oligopolistic markets, but what are his thoughts regarding regulation when competition is fair? How much would Tirole argue is necessary?
There doesn’t seem to be a mention of government-facilitated natural monopolies…why? Does Tirole think those are good for society?
Can you connect the regulation of “platform markets” which tend to provide services for free in exchange for valued information with the regulation of said information?

The past couple years have been quite provocative in the field of economics. In the realm of technology, the emergence of technologies like Bitcoin, which redefines the concept of money, has prompted attention from governments, not to mention a new kind of drug kingpin. The explosion of new revenue models for digital goods (emphasizing smaller, more frequent microtransactions) has usurped the traditional “kitchen sink” model for some games. The subscription model has become a popular way to acquire entertainment. Yet, not everything is positive; there is instability of the world economy, which can be attributed to violent conflicts occurring in many places, as well as recessions, climate change, and numerous other factors.

Analyzing economics is hence quite the task, but Jean Tirole has helped the world understand the field a bit more through his research into the intimate relationship between competition and regulation. I don’t care to regurgitate the information contained in the paper, but its main idea could be summarized as the need for industry-specific regulation in an economy where oligopolies and the monopolization of a part of a supply chain happen often.

I tend to favor a smaller government that interferes in citizens’ lives less. Citizens, though, which unfortunately has come to include corporate entities, especially in legal contexts. A major problem facing the USA is the situation of powerful oligopolies controlling platforms in a way that harms competition and innovation. The occurs across industries. The recent FCC ruling to classify broadband as a utility was bemoaned by nearly every major telecom. Why? Because they would prefer to continue profiting at the expense of competition and innovation. Almost 1 in 5 (19.4% of) American households do not have access to what the FCC considers broadband, which is 25Mbps/3Mbps. Yet, the US is far from the leader in broadband speed or price. FYI, Russia kicks our ass in this department, with a 6x lower cost-per-Mbps. Lobbying has resulted in it being illegal or very difficult to create municipal broadband in the US. So it is quite hard for any company smaller than, say, Google, to enter that market.

Stifling competition and harming innovation is the antithesis of what the American economy is supposed to be. If some industry-specific regulation is the antidote to that problem, we must accept that. Tirole’s regulation theory seems like a great way to improve the behavior of certain types of corporations without suffocating the economy with more inefficient blanket regulation.