LS16 + LS18 - Regulation, Regulatory Capture

Question 1

Downsides of monopoly power

Answer 1

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

Question 2

Anti-competitive policies

Answer 2

Strategies such as predatory pricing and collusion - limit degree of competition

Question 3

Competition policy

Answer 3

Policy to promote competition and efficiency in markets and industries

Question 4

Competition and markets authority

Answer 4

CMA - UK govt regulator responsible for promoting competition and preventing anti competitive practices

Question 5

Industry specific regulators

Answer 5

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

Question 6

Price regulation

Answer 6

A ceiling price is set to limit how much firms can increase prices by
Calculated with RPI ± X –> expected efficiency gains

Question 7

RPI - X

Answer 7

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

Question 8

RPI - X Drawbacks

Answer 8

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
Without the right information, setting X becomes more difficult - information might be withheld or altered in the firms favour, if regulators lack power

Question 9

Profit regulation

Answer 9

Used to regulate utilities in the USA - limit on amount of profits firms can make
One form of this is rate of return regulation

Question 10

Rate of regulation

Answer 10

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

Question 11

Performance targets and quality standards

Answer 11

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

Question 12

A + D of performance targets and quality standards

Answer 12

A - if set correctly they may act as a surrogate for competition by forcing firms to behave as if they were in a contestable market (aiming for high quality)

Question 13

Merger control

Answer 13

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

Question 14

RPI + K

Answer 14

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

Question 15

Regulatory capture

Answer 15

An economic theory that says regulatory agencies may come to be dominated the industries or interests they are charged with regulating. The result is that an agency, charged with acting in the public interest, instead acts in ways that benefit the industry it is supposed to be regulating

Question 16

Regulatory capture causes

Answer 16

Bribery:

Government officials to some extent are motivated by financial reward. Firms regulated by the government often stand to benefit from weak oversight, so company may try and bribe the government official

Familiarity:

To regulate industries gov officials often work closely with members of the firms they regulate (to receive info). Over time it can mean that regulators and employees of the firm become friendly towards one another, can lead to bias and an increased willingness to go easy on those they’re regulating

Revolving door:

Regulators often go on to work for companies they were previously responsible for regulating. Often these people are paid large salaries (former chancellor of exchequer George Osborne paid nearly 800k by blackrock). These jobs may be rewarded due to lenient treatment these firms received during the time regulators were in office

Question 17

Regulatory capture impacts

Answer 17

Quality:

If regulators don’t enforce minimum standards of service quality of goods and services are likely to falls and deteriorate

Price:

Prices likely to be higher is a regulator has been ‘captured’. For natural monopolies, this would mean regulators would be more likely to be generous when setting permitted price rises

Externalities:

External costs likely to be ignored if regulators have been captured. Restaurant regulator that’s been captures is less likely to ensure high food hygiene standards, could result in outbreaks of food poisoning thus causing people to miss work and increasing costs for public health care

Asymmetric information:

Competition policy relies on information. OFWAT must have a good understanding of the costs and levels of required investment in water industry to effectively regulate the water industry.
Likely that firms have better knowledge than regulators, therefore there’s a risk that info is withheld by firms or that regulators lack resources to properly oversee firms. This would decrease the changes of them being effective