Jean Tirole and competition in the modern economy

The New Republic published a cover story last week by Franklin Foer that provocatively labeled Amazon.com, Inc. a monopoly. At the heart of Foer’s piece is a call to update antitrust policy in the era of market-dominating online companies such as Amazon, Google Inc,, or Facebook, Inc. Foer doesn’t mention any economic research in the article, but he would have been well served if he looked into the research of the most recent winner of the Nobel Prize for Economics, Jean Tirole.

Yesterday, the Royal Swedish Academy of Sciences awarded The Sveriges Riksbank Prize in Economic Sciences to Jean Tirole of the Toulouse School of Economics. The committee gave the award to Tirole for his research understanding the interaction between powerful firms and the regulation of these firms. Tirole is a prolific researcher who has made valuable contributions to several areas in economics. For those interested, a non-technical document summarizing his work provided by the Nobel committee is available here.

But one of Tirole’s greatest contributions, the one relevant to the question of firms such as Amazon, is the idea of “two-sided markets.” The concept is also known as “platform markets,” which is a bit more descriptive. In essence, in these markets a firm is providing a good or a service that connects two or more other parties via a platform. The classic example is a credit card company. The company needs to convince individuals to use the credit card, but at the same time convince other companies to accept the credit card when the customers use it. The credit card company is providing a service.

Or think about an ebook reader, such as the Amazon Kindle. The company that produces the reader needs to sell the reader to individuals but at the same time create a stable of ebooks that can be used on the ebook reader. By describing these markets, Tirole gave economists and policy markets a tool kit to understand the business models of these companies. Only then can they judge whether those companies are acting anti-competitively.

As Matthew Yglesias at Vox and Izabella Kaminska at FT Alphaville point out, Tirole’s idea of platform markets describes many of the most prominent technology companies today: Facebook and Google. Like newspapers did and still do, these companies give information to consumers in exchange for this attention to advertisements from other businesses.

And of course, the very structure on which these companies rest, broadband internet, is an example of a platform market. Tirole’s work has direct implications for the regulation of broadband service and net neutrality. Josh Gans, an economist at the University of Toronto, argues that the reason the United States has little competition in the broadband section is because the government ignored the lessons of Tirole’s research.

The amazing thing about Jean Tirole’s research career is that the idea described above is just one part of it. Yet this one idea is incredibly relevant for modern economies as we move toward firms that more and more compete in platform markets. We’d all be best served by engaging with his idea and extending them as our economy changes.