Nobel Winner Jean Tirole’s Faulty Views on Monopoly

By Frank Shostak

Frenchman Jean Tirole of the University of Toulouse won the 2014 Nobel Prize in Economic Sciences for devising methods to improve regulation of industries dominated by a few large firms. According to Tirole, large firms undermine the efficient functioning of the market economy by being able to influence the prices and the quantity of products.

Consequently, this undermines the well being of individuals in the economy. On this way of thinking the inefficiency emerges as a result of the deviation from the ideal state of the market as depicted by the “perfect competition” framework.

The “Perfect Competition” Model

In the world of perfect competition a market is characterized by the following features:

Tirole Has No Understadning of How the Business Cycle Develops

The new Nobel Laureate in economics, Jean Tirole, wrote in a 1982 paper:

It is argued that price bubbles rely on the myopia of traders and they disappear if traders adopt a truly dynamic maximizing behavior.

Which means that Tirole doesn't understand, in particular, how central bank manipulations of the money supply distort markets and interest rates, and make it impossible for traders and entrepreneurs to better understand underlying conditions.  And it means in a broader sense that Tirole doesn't come close to understanding Austrian School Business Cycle Theory.

Peter Kein on Jean Tirole

Peter writes:

As a second-year economics PhD student I took the field sequence in industrial organization. The primary text in the fall course was Jean Tirole’s Theory of Industrial Organization, then just a year old. I found it a difficult book — a detailed overview of the “new,” game-theoretic IO, featuring straightforward explanations and numerous insights and useful observations but shot through with weird, unsubstantiated assumptions and written in an extremely terse, almost smug style that rubbed me the wrong way. After all, game theory was supposed to add transparency and “rigor” to the analysis, bringing to light the hidden assumptions of the old-fashioned, verbal models, but Tirole combined math and ad hoc verbal asides in equal measure. (Sample statement: “The Coase theorem (1960) asserts that an optimal allocation of resources can always be achieved through market forces, irrespective of the legal liability assignment, if information is perfect and transactions are costless.” And then: “We conclude that the Coase theorem is unlikely to apply here and that selective government intervention may be desirable.”) Well, that’s the way formal theorists write and, if you know the code and read wisely, you can gain insight into how these economists think about things. Is it the best way to learn about real markets and real competition? Tirole takes it as self-evident that MIT-style theory is a huge advance over the earlier IO literature, which he characterizes as “the old oral tradition of behavioral stories.” He does not, to my knowledge, deal with the “new learning” of the 1960s and 1970s, associated mainly with Chicago economists (but also Austrian and public choice economists) that emphasized informational and incentive problems of regulators as well as firms.

Another Reason to Be Suspicious of the Work of the New Nobel Laureate Jean Tirole...

...the beltarians seem to be big fans.

Alex Tabarrok writes:

Jean Tirole (working with Rochet) is a pioneer in one of the most important new areas in the economy and economics, the study of platform markets.

To consider platform market theory an "important new area' in economics shows you how far mainstream economists and beltarians are at understanding the key lessons that economics teaches us. While platform theory does provide some insight, its significance compared to, say, the work of  Israel Kirzner on competition and entrepreneurship theory doesn't come anywhere close.

Platform theory for the most part is about the development and working out of new equilibrium equations in a limited sphere of what is called two-sided networks. Kirzner's theories explain why equilibrium theories are extremely limited in value and take us into the much more important real world of disequilibrium and the market process that results from the disequilibrium.

Tyler Cowen also writes  on support of the Nobel award to Tirole:

It’s an excellent and well-deserved pick.

It should be noted that the Nobel committee specifically cited  Tirole's work "for his analysis of market power and regulation."

This is his work advocating government  interventions in the economy. Indeed, the Nobel committee calls Tirole's study "The science of taming powerful firms."

Which is another way of saying it is about becoming a mechanic for the government and seeing all sorts of ways the government supposedly needs to interfere with markets (and the firms operating within them). In other words, Tirole doesn't understand a damn thing about the lessons taught by the 1974 Nobel prize winnimg Friedrich Hayek and his observations about the impossibility of government central planning and the dangers of the type of tinkering by government advocated by Tirole.

In Profile: Jean Tirole the 2014 Winner of the Nobel Prize in Economics

Jean Tirole is professor at the Toulouse School of Economics, Toulouse, France.

He received his PhD from MIT in 1981. He also holds engineering degrees from the École Polytechnique in Paris in 1976, and from École nationale des ponts et chaussées, Paris (1978) and a "Doctorat de 3ème cycle" in decision mathematics from the Paris Dauphine University (1978.


Tirole was president of the Econometric Society in 1998 and of the European Economic Association in 2001.

Before moving to Toulouse in 1991, he was professor of economics at MIT and continues to hold a visting position there,

Jean Tirole has published about two hundred professional articles in economics and finance and given  several invited lectures, including the Hicks lecture (Oxford 1992), the Walras-Pareto lectures (Lausanne 1992), the Schumpeter lecture (European Economic Association 1993), the Pazner lecture (Tel Aviv 1993), the Walras-Bowley lecture (Econometric Society 1994), the Munich lectures (Munich 1996),the JMCB lecture (1999), the Wicksell lectures(1999), the Baffi lectures (2000) and the Scribner lectures at Princeton (2002).

He has also published10 books including, A Theory of Incentives in Procurement and Regulation, the subject for which he received the 2014 Nobel Prize in Economics. (SEE: Nobel Prize in Economics Awarded to Jean Tirole)

He has done research in industrial organization, regulation, game theory, banking and finance, psychology and economics, international finance and macroeconomics.

He was born on August 9, 1953 in Troyes, France.