Competition Authorities Should Listen to Jean Tirole

By Maria Salfi (Intern at ECIPE)

The recent Nobel Prize winner in Economics, Jean Tirole, has brought very important contributions to economics – and competition policy authorities should take on some of the key conclusions from his research.

In Industrial Organization, every model analyzing how firms interact with each other in a static and/or dynamic contest is based on some assumptions such as perfect market competition, the number of firms in the industry, homogeneous or heterogeneous preferences of consumers, constant (increasing or decreasing) return to scale. Moreover firms are treated as acting in the same way in different industries and there is little differentiation about the nature of the industry. All the analysis that has been done for years on how industries work and how firms interact with each other has potential to change. Tirole’s work differentiates between industries and takes into consideration the fact that firms can act in a different manner depending on the industry they are in. What are the implications for the competition authorities?

First of all, past cases in which firms would have been accused of unfair competitive behavior would have a different outcome now. During the presentation of his work at the Royal Swedish Academy of Sciences, Tirole made a clear example. Newspapers give away information at a very low price in order to acquire market share and increase advertising revenues. What at first can be perceived as a predatory behavior by the press firms, it is actually not. There is clearly a trade off between price and market share/advertising revenues. According to this line of reasoning, the context does matter. Different rules should then be applied to different industries and each case should be investigated individually.

Second, consumers should be taken into consideration. If the assessment of a merger or a monopolistic behavior are a priori considered detrimental for society it is then counterproductive. There are cases in which consumers have actually been harmed by a competition authority’s decision. Monopolies usually arise because they are the most efficient firms in the industry and it is not necessarily harmful for consumers.

Competition authorities can now utilize a solid tool to improve society. The definition of fair competition might then be reformulated, taking into consideration the real consequences and the effects that the competition authority’s decision can have on the market and on consumers.