LS16 - Regulation Flashcards
Dangers of Monopoly Power
- Higher prices and lower output than competitive conditions
- Important to regulate these monopolies to protect consumer interests
- Mainly natural monopolies and utilities - provide essential services to population - need to ensure fair price and good quality
Anti-competitive practices
Strategies such as predatory pricing and collusion - limit degree of competition
Competition policy
Policy to promote competition and efficiency in markets and industries
Competition and Markets Authority
CMA - UK govt regulator responsible for promoting competition and preventing anti competitive practices
Industry Specific Regulators
Introduced to regulate industries that had been privatised in 80s/90s, to combat low levels of competition these firms would face in the market
Govt could replicate competition - surrogate competitor
Water - OFWAT; Telecom - OFCOM; Finance - FCA
Price Regulation
A ceiling price is set to limit how much firms can increase prices by
Calculated with RPI ± X –> expected efficiency gains
RPI - X
Restrains price rises in industry, and incentivises natural monopolies/utility providers to increase efficiency - by reducing the price rise of a product, the firm must cut costs to maintain a profit - become more efficient
Required in case of monopolies - they have no competition and so have no incentive to cut costs
Drawbacks of RPI - X
- Difficult to calculate X - requires time and manpower - lot of research involved in studying firms costs and potential efficiency gains
- Without the right information, setting X becomes more difficult - information might be withheld or altered in the firms favour, if regulators lack power
- If X is set too low, there is less incentive for firms to cut costs; if X is set too high, firms are less likley to make profit - some firms might shut down
Profit Regulation
Used to regulate utilities in the USA - limit on amount of profits firms can make
One form of this is rate of return regulation
Rate of return regulation
Regulator allows firm to cover costs and earn a return based on the amount of capital they use - more capital, more profit
Used to incentivise investment, and productivity and quality gains are vital for essential services such as water, gas
However, firms might overpurchase capital to earn higher profits - investment just to earn more profits rather than to improve quality - inefficient use of resources; also little incentive to be productively efficient as regulator covers costs
Performance targets and Quality standards
Used to regulate monopolies and incentivise improvements in public organisations such as schools and hospitals
Ensure consumer needs are met
Surrogate competition to motivate firms to meet min standards
Trains - limit on number of delays and cancellations
NHS - A&E max wait time of 4h
OFGEM - energy providers have to restore services by 2h
Drawbacks of Performance and Quality targets
- Without sufficient sanctions, there will be no motivation to meet targets
- Risk of economics agents trying to game the system to meet targets - surgeons not taking on difficult surgeries to maintain high success rate
- Unintended consequences - police spending more time doing paperwork to prove they are meeting standards instead of doing their job
Merger Control
CMA investigates merger if combined firm would have market share >25% or a turnover >£70m
In some cases, a merger will result in worse conditions for consumers and the market - prices will rise, choice will fall, and market will be less efficient
Examples: ASDA+Sainsbury merger blocked in 2019, Tesco+Booker approved in 2017
RPI + K
Maximum price rise utility providers are allowed to make determined by RPI + K –> capital investment
Capital investment is important for natural monopolies and utility providers to improve quality of service
