The patron saint of regulators

Nightclubs hold regular nights for ladies. Some newspapers and most online news services are free. Everyone uses Google and Facebook without paying a cent.

One of the many enduring insights of French economist Jean Tirole, who won this year's Nobel prize for economics, is to discern the common feature of these phenomena as a type of "bait and switch", applied not just to single products but to entire industries.

Economists call them two-sided markets, where the profit-making potential of one market (advertising) depends on another (internet search engine). When you are using a service for free, someone, somewhere, is monetising your activities. In the age of the internet and social media, Tirole is especially relevant in understanding the economics of online services.

But the committee for the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel especially cites the importance of Tirole's work on market-dominant behaviour. It is in the regulation of markets where a few players dominate that his insights have influenced regulators, especially those in the European Union.

Traditional economics presupposes either perfect competition or monopoly. In real life, you often have players who dominate a market but don't control it. Sometimes, this can benefit consumers; sometimes not. Tirole argues there is no one-size-fits-all regulatory system. Between heavy regulation favoured by bureaucrats in Brussels and free-market evangelists from the US, Tirole cuts a middle path. Every regulatory framework has to address the defining features of an industry rather than imposing simple rules like capped rates of return to avoid unintended negative effects.

He was critical of the lax regulation of banks and financial markets long before the global financial crisis. Neither does he favour excessive and kneejerk regulation. But since the financial crisis, we are witnessing a revenge of the regulators. And Tirole may well be their patron saint.