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Economics Lessons by Nobel Laureate Jean Tirole : Nobel Price 2020

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Jean Tirole

(Image: Nobel Laureate Jean Tirole)

Nobel Laureate Jean Tirole

On Monday, Jean Tirole, a 61-year old professor at France’s Toulouse University, pulled out a Noble prize winning trump card which would make all the world economists envy. He was honored with the $1.1 million Nobel Memorial Prize in Economic Sciences “for his analysis of market power and regulation.”

Tirole is a part of group of some very influential economists from the Toulousse School of Economics who produced several significant pieces in Industrial Organization. Jean-Jacques Laffont, Patrick Rey, Paul Seabright, Marc Ivaldi and Jean Charles Rochet are some of the most well-known economists besides him.

"He has given us an instruction manual for what tool to use in what market," said Torsten Persson of the prize committee. "Politicians would be stupid not to take his policy advice."

Tirole has done top notch work, utilizing game theory to analyze markets in which there are single or a couple of predominant dealers. He had been tipped for a Nobel Prize since quite a long time. A good number of economists would likely be of the same opinion that he is worthy of the merited Nobel prize that trumps all the previous achievements.

Right from late 1960s to the early 1980s, the field of industrial organization was ruled by the Chicago School, where four of the real players were the late George Stigler (who was merited with the Nobel Prize in 1982), his associates Sam Peltzman and the late Yale Brozen, and UCLA economist Harold Demsetz. They contended that despite the fact that most businesses don't fit the economists' model of "perfect competition" in which no firm has the ability to set a value, this present reality was bounty aggressive. Firms contend by cutting expenses, by cutting cost and by being inventive. These economists' understanding of the omnipresence of rivalry headed them to be distrustful about much of antitrust law and most government regulation.

Regulators and Incentives

In the 1980s, Tirole employed game theory to the field of industrial organization. The key thought here is that organizations with market power consider how their adversaries are liable to respond when they change rates or item offerings. The Chicago School economists perceived this however did not thoroughly utilize game theory to delineate a portion of the suggestions, which however, Tirole did.

Tirole and his late associate Jean-Jacques Laffont focused on “asymmetric information”. A regulator has less data than the organizations it standardizes. Along these lines, if the controller speculated any bit erroneous around a regulated firm’s expenses, which is dreadfully possible, it could set costs excessively low or excessively high. Tirole, Laffont and Messrs, demonstrated in 1986 that a smart controller could balance this asymmetry by building contracts and letting the firm pick which contract to acknowledge.

"If Jean Tirole can be said to make one idea, it's that the world is complicated," says economist Alex Tabarrok. "And a lot of things can change depending upon small differences in who knows what information."

Assume that a few firms can bring down their expenses which other firms can't, yet the controller can't recognize them. A controller may offer the organizations either a cost-plus contract or a fixed-price contract. The expense in addition to contract will engage firms with high expenses while the settled value contract will attract those organizations that can bring down their expenses. Thus the controller keeps up incentives to lower costs.

These bits of knowledge are most straightforwardly relevant not to regulation however to government bodies like the Defense Department when it arranges with firms giving heavy goods such as boats, tanks and planes.

"Precisely because different rules are optimal in different circumstances, the regulator, even a sophisticated regulator, might not be able to pull off the trick which Tirole recommends that they try," Tabarrok says.

George Mason economist Tyler Cowen 's first response to Monday's prize report, posted on his Marginal Revolution site, was that Mr. Tirole's work is truly about principal-agent hypothesis, not about controlling huge businesses. In the Defense Department illustration here, the contractor is the agent and the Pentagon is the principal.

Two-Sided Markets

Tirole additionally has analyzed two-sided markets in which organizations sell to two separate groups of consumers. Take an example of Google; it can rate its services to users (one side) and its services to advertisers (the other side). The higher the cost to users, the smaller number of users and, accordingly, the less cash Google would make from advertising. Google's decision is to lay down a zero price to users and to charge for advertizing. Another example is of credit card companies, which apply this strategy to pay their customers who use the cards in order to charge the dealers massive amounts of fees. One more application of this strategy is for newspaper (users: readers and clients: advertisers) as well as video games (users: gamers and clients: developers). In 2006 Tirole and Jean-Charles Rochet showed that the assessment about profit-maximizing rate is problematical, and they do some intense math to figure such costs under different hypothetical conditions.

However they don't confer the slip-up of the opinion that controllers are fundamentally superior to firms in setting costs. Consider the most recent example of interchange fees (IF) in payment-card associations like Visa and MasterCard. A majority of controllers have bolstered government regulation of such charges. Nonetheless in 2003, Messrs. Rochet and Tirole composed that “given the economics profession’s current state of knowledge, there is no reason to believe that the IFs chosen by an association are systematically too high or too low, as compared with socially optimal levels.”

"I was incredibly surprised at the honor, and it took me half an hour to recoup" said Tirole in an interview with the website Nobelprize.org.

Nobel Prize in Economics 2020

American economists Paul Milgrom and Robert Wilson have been bestowed the 2020 Nobel Prize in economics for their influences to auction theory, the Royal Swedish Academy of Sciences said on Monday.

Milgrom and Wilson, who are both professors at Stanford University in California, were renowned for theoretical discoveries that enhanced how auctions work. According to the Royal Swedish Academy of Sciences, they also designed auction formats for goods and services that are tough to sell in a traditional way, such as radio frequencies.

"This year's Laureates in Economic Sciences started out with fundamental theory and later used their results in practical applications, which have extent universally. Their discoveries are of prodigious benefit to society," Peter Fredriksson, chair of the prize committee, said in a statement.

Conferring to the Royal Swedish Academy of Sciences, the economists conceived new formats for auctioning many unified objects on behalf of a seller inspired by doing good for society rather than merely achieving the peak price possible.

In 1994, US authorities first used one of their formats to sell bands of radio spectrum. Doing so helped ensure that taxpayers were benefiting from the sale of radio frequencies that were owned by the government but of massive value to mobile network operators.

The prize for economics is legitimately known as the Sveriges Riksbank Prize in Economic Sciences. It was established by Sweden's central bank and has been awarded since 1969 in memory of industrialist Alfred Nobel.

U.S. Auction Theorists Win the 2020 Nobel in Economics

Auctions are at the heart of this year's Nobel Memorial Prize in Economic Sciences. The winners — Stanford University professors Paul Milgrom and Robert Wilson — were renowned "for improvements to auction theory and inventions of new auction formats."

They premeditated the auction the FCC used to sell radio spectrum to wireless telephone companies, raising more than $120 billion for something the government used to give away for free.

"Auctions are universally and touch our everyday lives," the prize committee said in a statement. Milgrom and Wilson's work "benefit[s] sellers, buyers and taxpayers around the world."

Many of the questions in auction theory spin around information. Do bidders distinguish what competitors are bidding? Do they all put the same worth on the item being auctioned?

The committee recognized Milgrom and Wilson not only for their basic research into the behavior of auction participants, but for their application of those findings to design better auctions.

Auctions are nowadays used to price all kinds of things counting Internet ads, wholesale electricity, fishing permits and carbon pollution credits.

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