When explaining the economic “DNA” of Market Platform Dynamics, I always describe it as having its roots in the work of a genius French economist, Jean Tirole a long-time colleague of the two economists who also happen to be our Chairman and Founder, Dick Schmalensee and David Evans.
I always used to end my overview by saying that one of these days, Jean Tirole would win a Nobel Prize for his work. Well, that day was yesterday, October 13, 2014.
Yesterday, Jean Tirole was awarded the 2014 Nobel Prize in Economic Science, in part for his revolutionary work on two-sided markets including credit cards. Tirole is one of the world’s leading economic thinkers on payment cards and has written extensively on the subject. In fact, his work on two-sided markets was stimulated by his analysis of interchange fees. His classic paper, with Jean-Charles Rochet, discovered the concept of two-sided markets, highlighted payment cards. Ever since this classic paper started circulating around 2000 as a working paper his theory of two-sided markets has revolutionized how economists analyze interchange fees and other aspects of the payment card business.
According to MPD Founder David S. Evans, who has known and worked with Professor Tirole for many years, “Tirole has made extremely important contributions to many areas of economics. His work on two-sided markets—or multi-sided platforms—has really revolutionized how economics analyzes many important businesses and has shown that many traditional results in economics don’t apply to businesses as diverse as shopping malls, payment cards, software platforms, and advertising-supported media. His work has had an enormous influence on business strategy, antitrust and regulation, as well as economics.”
Professor Tirole, along with his colleague, Jean-Charles Rochet, is also the inventor of the “tourist test” which has been used by the European Commission and others in considering regulation of interchange fees. He has cautioned against the misapplication of this test and has noted that it places a lower bound on the appropriate fee.
Equally remarkable is that he didn’t share this award with anyone else, the first time in many years that the Prize was awarded to a single individual.
Tirole is a professor at the Toulouse School of Economics which he was instrumental in founding, building on the work of his late colleague, Jean-Jacques Laffont. He is a visiting professor at MIT where he received his Ph.D.
“This is thrilling for all of us who remember the days when talking about two-sided markets and the economics of these businesses was like talking a different language. It has taken a decade for this concept to be part of the mainstream thinking but is why we often have a very different perspective on how and why innovation in these very complicated ecosystems will ignite and be successful,” remarked David Evans.
Catalyst Code (Harvard Business School Press) authored by David Evans and Dick Schmalensee, was published in 2007 as the first managerial book on the application of two sided economics to business. It was organized around a framework for how to “ignite” these complex ecosystems. Here’s what Evans and Schmalensee wrote in the book’s introduction, which acknowledged the work of Professor Tirole:
“Almost twenty years later two world-famous economists based in Toulouse, France—Jean-Charles Rochet and Jean Tirole—were working on a mathematical analysis of interchange fees and extending Baxter’s work. They had the deep insight that their models were relevant to many other businesses such as dating clubs, shopping malls, and video games. They coined the term “two-sided markets” to refer to these industries. Their seminal article on this subject was published in the Journal of the European Economic Association in 2003. Since then “two-sided markets” has become one of the hottest areas in economics and is the subject of numerous scholarly papers and conferences. “Two- sided markets” is all about catalysts.”
Evans organized and teaches an online course on Catalysts, how to build them, monetize them and ignite them. If you ever wanted to know how to apply these Nobel-prize winning insights to business, click here. Finally, Professor Tirole’s papers on payment cards are listed below with the least technical papers ones first.