Economics Nobel for Tirole: A reason to celebrate for LIRNEasia

Posted on October 14, 2014  /  1 Comments

The award of the 2014 Nobel Prize in Economics to Jean Tirole is a cause for celebration for LIRNEasia. At the time of its inception in 2004, LIRNEasia committed itself to blend theory and practice to inform policymakers. One area identified by Rohan Samarajiva the founding Chair of LIRNEasia, was regulatory rules governing the telecommunications sector in the region. Regulatory agencies and regulation had already become an integral component of the telecom reform process in countries like India, Bangladesh, Pakistan and Sri Lanka.

There was no way that a policy think tank conducting research in telecommunications to inform policy for improved sector performance and regulatory processes could have ignored Tirole’s three decades of research in the domain of Industrial Organization (IO) that provided a normative theoretical basis for evaluating the structure and performance of individual markets (including telecommunications) and for economically reasoned intervention in them.

Before Tirole’s systematic theoretical work in the area of “optimal regulation” in network industries such as telecommunication,  it was well understood that certain markets had to be imperfect, e.g., natural monopolies, and that this called for government intervention in the service of social welfare. However, the normative theory required for prescribing the nature and extent of such regulation was scanty and did not add up to a methodical framework amenable for applying to regulatory practice. Tirole filled the gap and as they say rest is history.

The Sector Performance Research studies conducted by LIRNEasia, its Mobile 2.0@ BoP work on issuing of frequency licenses, Universal Service Obligation in telecommunications etc. drew heavily on this literature; weaving it in the institutional and political economy milieu of the countries in question and thereby guiding policy and regulation. LIRNEasia can take this opportunity to celebrate the fact that it was an instrument in taking Tirole’s ideas forward such that they translate into actionable research.

The Scientific Background on the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2014, compiled by the Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences, is titled Jean Tirole: Market power and Regulation. This backgrounder recognizes Tirole’s immense contribution to research on the regulation of specific industries such as telecommunications and goes on to say:

…“it illustrates Tirole’s exceptional ability to grasp the central features of an economic environment, to formulate these features mathematically, to analyze the resulting model, and to produce normative conclusions of great practical significance. Although the motivation for the prize focuses on normative theories of optimal regulation and competition policy, any normative theory must rest on a positive analysis of how firms interact. For competition and regulation policy, it is especially important to understand interaction in imperfectly competitive markets. Therefore, oligopoly theory is the most central topic in IO. Jean Tirole played a major role in the transformation of oligopoly theory during the 1980’s….

The liberalization of industries dominated by vertically-integrated incumbents — such as telecommunications and electricity — made access pricing a hot topic in regulatory economics and policy. Further work by Laffont and Tirole clarified the optimal regulation of access prices.”

So, while LIRNEasia’s endeavors continue, we take a pause to congratulate the great man Jean Tirole.

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