Goverment Intevrention - Monopolies Flashcards
Why do monopoly situations need to be regulated
- monopolies lead to higher prices and lower output
- against consumer interests
Which industries need to be regulated
- natural monopolies and utilities
- as these are essential services so need to be affordable
Who is responsible for regulation and competition
- the CMA is the government body which is responsible for implementing competition policy and preventing anti competitive practices
What is competition policy
- any policy which incentivises commotion and being efficient
What are anti competitive practices
Anti competitive practices refer to practices which lead to deterrence of comeption such as predatory pricing and collusion
Why were Industry regulatory bodies implemented
- in the 1990s and 80s many industries became privatised
- many of these were natural monopolies and utilities
- this hui,t a case for them to be regulated
- regulation attempts to recreate the effects of competition, this is known as surrogate competition
Who regulates water, energy, financial services, railways, telecommunications
Ofwat
Ofgem
Fca
Orr
Ofcom
What is price regulation and what is it used for
- price regulation is when a cap is put on the price firms charge
- it is used to regulate natural monopolies
- ir aims to bring price closer to allcoativeky efficiency
- this is important as utilities need to be affordable for everyone
What is rpi - x
Rpi is a form of price regulation used by ofgem and orr
- the maximum price firms are allowed to increase prices by is rpi- x
- X refers to expected efficiency gains
- if rpi is 2.4% and X is 1.5%, the max firms are allowed to increase prices is 0.9%
What does rpi - x aim to do
- restrain price increases for consumers
- incentivise increasing efficiency
How does rpi - x incentivise efficiency
The price cap lowers prices and this therefore lowers revenue, so to be profitable or maintain profits, the firms will need to cut costs/ be more efficient
How is X calculated
- regulators investigate the costs of each firm in the industry to gain understanding of efficiency gains
- this requires lots of information and skilled professionals
What are the advantages of rpi-x
- restrains increases in prices which then protects consumer interests
- increased efficiency which lowers prices for consumers and allows efficiency gains to be passed on
- can be a tool for increasing inflation
What are disadvantages of rpi-x
- gaining and understanding information about firms and setting X requires lots of time and manpower as they have to thoroughly research everything
- without access to right information it is difficult to set X, reguaktirs may not have the legal power to demand information and if the punishment for information withheld is weak they will not get all information
- if X is too low, there is no incentive to be efficient
- if - is too high, it is too hard to be profitable and firms may leave the market
- price regulation may lead to job losses as firms are trying to cut costs
- could leave the consumers worse off as lower profits mean less conspiracy invetsment
What is profit regulation
- An alternative to price regulation
- puts a limit on the amount of profit firms are able to learn
What is an example of profit regulation
Rate of return regulation
Who uses ROR regulation
Utilities in the usa
How does ROR work
- regulators cover the costs of firms and the firms earn a return based upon the amount of capital they use in the production process
- the more capital a firm uses the greater profit they can earn
- this incentivises capital use which leads to improvements in quality and general maintenance which is vital for utilities such as water
What are the advantages of ROR
- incentivise investment which leads to greater quality and maintenance
What are disadvantages (rate of return regulation)
- some firms may spend on capital for the sake of it not to actually improve or maintain the utilities
- there is a lack of an incentive to be productively efficient for these firms as their costs are covered
What are performance targets
Performance targets are used to reguakte monopolies and incentivise improvements in public organisations such as schools
What is an example of a performance targets
A limit on the amount of times a train is allowed to be late in a calendar year
What are quality targets
Quality standards are a minimum expectation of service regulators expect these firms to meet
Example of quality standards
- electrical companies have to solve a power cut in a certain time
Everyone in the hospital has to be cared for within 4 hours
