RACHEL MARTIN, HOST:
The Nobel Prize for economics this year goes to Jean Tirole of France for his analysis of market power and regulation. Tirole has written some highly influential books about how to make large firms more productive and what regulators should do to keep them from abusing their position. Tirole will be awarded the Nobel in Stockholm on December 7. The Nobel carries with it a cash prize of more than a million dollars. NPR's Jim Zarroli joins me to talk about more about Jean Tirole and his work. So, Jim, first off, just tell us a little bit about this economist and why he is the Nobel committee's pick this year.
JIM ZARROLI, BYLINE: He is a professor at Toulouse 1 Capitole University in France. Together with his late partner Jean-Jacques Laffont, he wrote several books looking at how to keep large firms from abusing their positions. He's also an expert on specific industries such as telecommunications and banking that have been struggling with some of these questions especially lately. So in a way, when we're dealing with this issue of too big to fail, I mean, this is a very timely award.
MARTIN: And as you say, he's worked on this issue - how to control really big companies or monopolies even. Can you talk a little bit more about how he views them and how to keep them in line?
ZARROLI: He says in many cases, being a big, large company is a good thing because large companies can be more productive. We want business to flow from smaller, less-productive companies to bigger companies. But there are some industries where this is not the case -industries like railroads and utility companies - the cost of entry, the capital costs, are so high that you really can only have one, maybe two, major players. And if there are newcomers trying to get into this business, these firms can abuse their position to try and block them from entry. So the committee says Professor Tirole has used game theory to look more deeply into these issues than any economist has before him.
MARTIN: So those are some of the problems. What are the solutions that Professor Tirole outlines?
ZARROLI: He says 30 years ago, the answer would've been to cap the firm's profits - the big firm's profits. In other words, you'd tell that big utility company it can only make so much money, no more than that. The problem is that regulators often don't understand the markets they regulate very well. So they don't know the potential scope of improvement; they don't know how much really can be done to make the industry more productive. And the company doesn't have any incentive to tell them because it knows that if it does - it makes more profits, it will have to sacrifice it. So some companies can actually be unwilling to become more productive. So Professor Tirole has studied ways to allow some of these producers to keep more of the value that they generate, and one of the things he says is that all industries are different, some needed to be treated one way and some needed to be treated another.
MARTIN: Does his framework of analysis apply to the industry of tack? I mean, which is obviously a burgeoning industry, a lot of change and there are companies in that world, like Google, that are so huge that they have this tremendous impact at a very fast rate.
ZARROLI: Right. Yeah, he was actually asked about Google this morning at a press conference. He said it was an example of a two- sided market; it has two customers. One is us, the users, the eyeballs, but then another is the advertisers. And in such cases, often there's an asymmetry to the value that the customers are getting. You as a customer get quite a lot from Google, whereas the advertisers have to pay a lot to be on the site. So this is a factor that really complicates efforts to regulate companies like Google, and he says regulators really have to take this into account when they're trying to figure out how to deal with it.
MARTIN: NPR's Jim Zarroli on the Nobel Prize winner for economics. Thanks so much, Jim.
ZARROLI: You're welcome. Transcript provided by NPR, Copyright NPR.
