Tuesday, October 14, 2014

Jean Tirole, A Practitioner Of New Industrial Organization

I have occasionally summarized certain aspects of microeconomics, concentrating on markets that are not perfectly competitive. Further developments along these lines can be found in the theory of Industrial Organization.

One can distinguish in the literature two approaches to IO know as old IO and new IO. Old IO extends back to the late 1950s. Joe Bain and Paolo Sylos Labini laid the foundations to this approach, and they were heralded by Franco Modigliani. I have not read any of Bain and only a bit of Sylos Labini. Sylos was a Sraffian and quite critical of neoclassical economics. He also had interesting things to say about economic development.

As I understand it, new IO consists of applying game theory to imperfectly competitive and oligopolistic markets. I gather new IO took off in the 1980s. Jean Tirole, the winner of this year's "Nobel" prize in economics, is a prominent exponent of new IO.

One can tell interesting stories about corporations with both old IO and new IO. For example, Tirole has had something to say about vertical integration which, based on what I've read in the popular press, might be of interest to me. (Typically, when I explore the theory of vertical integration, following Luigi Pasinetti, the integration is only notional, not at the more concrete level of concern in IO.)

I wonder, though, whether economists can point to empirical demonstrations of the superiority of new IO over old IO. Or have economists studying IO come to embrace new IO more because of the supposed theoretical rigor of game theory? Are specialists in IO willing to embrace the indeterminism that arises in game theory, what with the variety of solution concepts and the existence of multiple equilibria in many games? Or do they insist on closed models with unique equilibria?

  • Franco Modigliani (1958). New developments on the Oligopoly Front, Journal of Political Economy, V. 66, No. 3: pp. 215-232.

Update (same day): Corrected a glitch in the title. Does this Paul Krugman post read as a direct response to my post?

1 comment:

Matias Vernengo said...

Not my area of research, although my masters course was on old IO, with a lot of Steindl, Labini, and the literature on structure-conduct-performance. Tirole's book was starting to be used. My take is that the old one forced economists to deal with the specific institutional arrangements of various economic sectors (how much spending on R&D in the pharmaceutical versus the textile sector and so on), while the new approach, has been more concerned with how actors react to regulation, etc. In other words, more concerned with behavioral issues, instead of the structure of the economy.