Before Tirole, researchers and policymakers sought general principles for all industries. They advocated simple policy rules, such as capping prices for monopolists and prohibiting cooperation between competitors, while permitting cooperation between firms with different positions in the value chain.
Tirole showed theoretically that such rules may work well in certain conditions, but do more harm than good in others.
Price caps can provide dominant firms with strong motives to reduce costs—a good thing for society—but may also permit excessive profits—a bad thing for society.
Cooperation on price setting within a market is usually harmful, but cooperation regarding patent pools can benefit everyone. The merger of a firm and its supplier may encourage innovation, but may also distort competition.
- Nobel Committee