citationsThere are lots of criteria that we use to think about why someone should win a Nobel prize. There is creative genius, there are pioneering findings but, in reality, the dominant criteria is impact. The tough issue is usually “impact on what?” Because being at the frontier is difficult, most specialise in their impact. To be sure, someone is going to try and explain in a press release why dynamic stochastic general equilibrium theory helps the economy or mechanism design has impacted on productivity but, in reality, like the contributions of Einstein, if there is a broader impact from frontier ideas it is usually carried out by others in the relatively far future. Which is the reason, by the way, that many Nobel prize winners in economics tend to be older.

The rarer case, however, is the economist who is more like Louis Pasteur. Pasteur, famously, founded the field of microbiology and with it vaccination: A fundamental advance in science alongside an incredible invention that impacts directly on people. Donald Stokes, the famed historian of Science, liked to think of scientist impact as having two dimensions: academic and applied. When an idea managed to have impact on both fronts, he termed in Pasteur’s Quadrant.

It is safe to say that it would be hard to find a Nobel prize winning economist in the last decade that so squarely falls into Pasteur’s Quadrant than Jean Tirole, this year’s winner. Let’s start with the academic dimension. His work has been cited 80,000 times (let me check the number of zeros on that; yep that’s right) and so regularly tops the list of economists likely to win a Nobel prize on that dimension alone. This includes an H-index of 115. Others will no doubt discuss this impact. For me, if there is a single person who has most inspired my research over my career, it is Tirole. My quick count this morning indicated that half of my over 100 academic publications would not exist but for a Jean Tirole paper.

But let me turn to the other dimension: applied impact. There are many economists who have applied impact following their more academic work (auction theory is an obvious example). There are other economists who have applied or broader impact because they engage in policy advice or consulting. But there are very few who have it because their academic work contains both fundamental advances and the broader impact in one. And that is Jean Tirole. His work on regulation has influenced virtually all price and non-price regulation of firms with market power for two decades. It was not simply because he used information economics to understand regulation. Instead, he was there thinking about these problems as they arose and literally wrote the book on those issues.

Perhaps the most fundamental was his work on multi-sided markets or network markets. In the 1980s and early 1990s, Tirole had started out — along with Jean-Jacques Laffont (who surely would be sharing the prize today had he not passed away at too early an age) — looking at the regulation of public utilities and, for the first time, providing the rationale for why Ramsey pricing should be used as these were often multi-product firms — or at least multi-objective ones. But the deregulation of telecommunications changed everything. This was a network industry and this meant that competing firms would also have to have a layer of cooperation amongst them in order to allow any-to-any connectivity. But we know that if you leave firms to come up with the terms of the cooperation themselves, they are going to find a way to remove the competitive parts as well. Regulators did not understand that before Tirole. To be sure, there was nervousness but before then there were no rules as to how to deal with it. Tirole solved that with a set of rules and practices that would regulate interconnection terms amongst telecommunications companies for decades while ensuring there were adequate incentives to compete — and not just on price — but on investment in infrastructure.

If those in the US are not as familiar with this, it is because the US has not adopted the regulatory stance advocated by Tirole. Want to know why there is so little competition in telecommunications and broadband service in the US? go open one of Tirole’s books; it is time you listened.

This worked evolved in many directions. Tirole (along with Jean-Charles Rochet) took on credit cards which, as a side note, founded the most important applied theory field in industrial organisation in the last decade: the theory of two-sided markets. Tirole (along with Mathius Dewatripont and Bengt Holmstrom) a decade ago, anticipated the financial crisis, and developed the foundation for the rules of the regulation of liquidity and risk. Today, Tirole (along with Josh Lerner) has shown the way in how to think about patent pools and standards-essential patents — showing that we can have cooperation and competition in innovation at the same time. This stuff finds its way directly into practice. It is literally written in legislation.

Finally, I’d like to end on a personal note. Jean Tirole has always been extremely generous to others and me in particular. He has offered advice and goes out of his way to promote, cite and acknowledge the contributions of others. Jean is an incredibly nice guy. But he has also had a third impact that is hard to under-state. I didn’t study industrial organisation or regulation when I was at Stanford doing my PhD (well, at least, not in any broad way). But within a few years of graduating it was my field. This is because I was reacting to policy issues around me in Australia. And when I had to learn about those issues to get up to speed, Jean Tirole had book after book waiting for me. His textbooks dominate microeconomics. We know it but rarely reflect on it. He taught me The Theory of Industrial Organization, A Theory of Incentives in Regulation and Procurement, Game Theory, The Theory of Corporate Finance, The Prudential Regulation of Banks, Competition in Telecommunications, and many more. I have a whole shelf of this. And not a decorative shelf. I have lived these books. Worn them down. In graduate school, another student once said that his thesis would be providing the even numbered solutions to Tirole. I’m no longer sure which book he has referring to. But we knew that regardless that would be a PhD worthy achievement.

27 Responses to Tirole and Pasteur

  1. […] With Rochet, he has a well-known paper on platform competition, laying out the basics of how these “two-sided” markets work.  Think of internet or payment portals which must get both sides of the market on board.  What are the efficiency properties of such markets and what are the game-theoretic issues?  In this setting, how do for-profits compare to non-profits?  Competition to monopoly?  Rochet and Tirole laid out some of the key basics here, here is their survey piece on the field as a whole.  Alex’s post above has much more on these points.  Joshua Gans covers this area too. […]

  2. […] UPDATE: Diane Coyle expresses what I wanted to say, with greater elegance. Also see Joshua Gans. […]

  3. […] papers heeft (en bepaald niet in kinderachtige bladen), en meer dan 80.000(!) citaties (zie hier). Uiteraard heeft het Nobelcomite zelf weer uitstekende informatie (hier) en kan de geinteresseerde […]

  4. David Havyatt says:

    Josh, my copy of Competition in Telecommunications is autographed by both Laffont and Tirole.

  5. […] from Joshua Gans. For more on Tirole, see Tyler Cowen and subsequent posts by Alex and […]

  6. […] there is a case to be made that Americans are arguing about net neutrality because the US didn’t adopt Tirole’s optimal strategy to regulate companies like internet service […]

  7. […] I'll turn the discussion over to others: Nobel Prize 2014: Jean Tirole – A Fine Theorem Tirole and Pasteur – Digitopoly Jean Tirole, Nobel Prize Economics 2014 […]

  8. […] Jean Tirole won the 2014 Nobel Prize in Economics.  (Marginal Revolution, Digitopoly, Real Time […]

  9. […] very own Joshua Gans has a nice appreciation over at rival digitopoly […]

  10. […] (e.g., WSJ, Economist) and sympathetic, even hagiographic treatments in the blogosphere (Cowen, Gans). By all accounts Tirole is a nice guy and an excellent teacher, as well as the first French […]

  11. […] Indeed, there is a case to be made that Americans are arguing about net neutrality because the US didn’t adopt Tirole’s optimal strategy to regulate companies like internet service […]

  12. […] Joshua Gans writes for Digitopoly, it’s singular for a Nobel leader to make both a poignant fanciful grant and to have a approach […]

  13. […] Revolution has a number of posts or you can check out Wonk Blog.  Digitopoly discusses how Tirole is like Louis Pasteur.  Vox has a nice overview of Tirole’s work as well and an example from […]

  14. […] about how to think about that world,” said Joshua Gans, a professor at University of Toronto who blogs about competition in the digital […]

  15. […] about how to think about that world,” said Joshua Gans, a professor at University of Toronto who blogs about competition in the digital […]

  16. […] how to think about that world,” said Joshua Gans, a professor at University of Toronto who blogs about competition in the digital […]

  17. […] Вишенка на кучке:“Let’s start with the academic dimension. His work has been cited 80,000 times (let me check the number of zeros […]

  18. […] WSJ, NYT czy Economist) i ciepłe, a czasem nawet hagiograficzne, opisy w blogosferze (Cowen, Gans). Nie ma wątpliwości co do tego, że Tirole jest przemiłym człowiekiem i znakomitym […]

  19. […] wrote right after the Nobel announcement that he has “a whole shelf … and not a decorative shelf” of such books by Tirole and has […]

  20. […] En este sentido, Tirole promueve que existan condiciones que permitan de modo satisfactorio la plena competencia en la conexión domiciliaria de servicio de cable y telefonía cuando las redes y la conexión están en manos de grandes operadores oligopólicos.  Por caso, la […]

  21. […] Touching, personal and interesting from noted economist Joshua Gans. Illustrates his sheer breadth across the discipline, also the vast range of applied contexts. The best econoblogger on the internet agrees. […]

  22. […] professor of strategic management at the University of Toronto with close ties to Tirole notes that end-to-end connectivity requires cooperation between competing firms like Netflix and Comcast, but adds that “if you leave firms to come up with the terms of the cooperation themselves, […]

  23. TaxVox says:

    […] Tirole is an influential, respected, and by all accounts gracious man who won this year’s Nobel Prize in economics. Bertha is a 7,000-ton tunnel boring machine […]

  24. […] Apple Pay. C’est une autre application de la théorie « les 2 faces du marché » de Jean Tirole, appliquée sur les cartes de crédit comme l’a expliqué Joshua Gans, professeur de management à l’université de […]

  25. David Walker says:

    A lovely tribute, Josh.

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