A Nobel Prize for dr Ting Li?


As we conclude our study of Information Strategy, it may be worth wondering to what extent the knowledge we are gaining is relevant to us today. Well, the good news is we seem to be doing OK at the moment.

It is of last week the news that French professor Jean Tirole is the winner of the 2014 Nobel Prize in Economics, possibly the most prestigious achievement in an academic’s life. According to the Royal Swedish Academy of Sciences “He has made important theoretical research contributions in a number of areas, but most of all he has clarified how to understand and regulate industries with a few powerful firms.” Of particular interest of us is his work on pricing platforms with cross-sided network effects.


Antitrust and regulation of two-sided markets is challenging because the two sets of prices may look discriminatory or unfair even when they are welfare enhancing. Pricing in such markets often requires to cross subsidize the some users that will have greater leverage on attracting more users. The Android operating system, for example, is provided for free by Google to users, developers, and phone manufacturers, in an attempt to encourage adoption and gain a broader user base. Given the power and the incredible cash available at Google, the question for regulators is whether or not this represent an unfair advantage for the firm firm has over smaller rivals. In other words, if pricing goods below cost is a means to kill competitors through predatory pricing and thus should be prevented from antitrust regulations.

Tirole’s work provides the right answer to this dilemma: it depends. Industry specificity matter greatly in assessing the existence of predatory pricing. With information goods though, which are inexpensive to reproduce by definition, it seems that giving away free products is only a means to drive up the platform value and not a temporary attempt to kill competitors.  In  newspaper market, for example, giving away papers for free can be a way of attracting readers and increase the use of the platform. New advertisers will then come in to cover the losses due to production and distribution. In this case, it is doubtful whether undercutting should be banned. Along with Jean-Charles Rochet, Tirole has increased our understanding of these platform markets where there is a strong link between players on different sides of a technical platform, such as readers and advertisers in the case of newspapers

In conclusion, Dr Li may not have won a Nobel Prize yet, but we can be sure that BIM students are at the forefront of understanding the technological changes and the implications for firms’ strategies. For now, it seems more than good enough!

References

http://marginalrevolution.com/marginalrevolution/2014/10/tirole-and-platform-markets.html
http://www.economist.com/blogs/freeexchange/2014/10/economics
http://www.vox.com/2014/10/13/6967383/jean-tirole-nobel-economics-2014

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