Government regulation of privatised industries

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  • Price fixing agreements that avoid competing on price
    Market sharing agreements where firms keep to separate geographical areas
    Cartels- when competing businesses agree on their marketing strategy
    Exclusive dealing - forcing supplier to deal exclusively with the dominant firm
    Refusing to supply distributors who handle competitors’ products
    Full line forcing – dominant firm forces distributors to stock all of its product line
  • Government regulation of privatised industries

    1. 1. Competition policy in the UK Monopolies and Efficiency
    2. 2. Your task Governments have a range of antimonopoly policies which they can use to improve economic efficiency In your examination, you will need to evaluate these policies.
    3. 3. The verdict?  It can now be seen that it is not possible to come to any simple conclusions about the desirability of the competition in the market.  Competition is by no means always ‘best’. On the one hand, monopolists and many imperfectly competitive firms (Oligopolies) may exploit the market, earning abnormal profits at the expense of consumers, reducing output and increasing price. This leads to welfare loss. On the other hand, natural monopolies are far more efficient than any alternative competitive market structures. There may or may not be a link between monopoly and innovation.
    4. 4. Measures aimed at enhancing competition Governments have a range of antimonopoly policies which they can use to improve economic efficiency Taxes & subsidies Price controls Nationalisation Privatisation & deregulation Breaking up the monopolist Reducing entry barriers
    5. 5. Specification  Evaluate measures aimed at enhancing competition between firms and their impact on prices, output and market structure  Explain why governments may intervene to encourage competition, or prevent monopolies and mergers  Compare and evaluate the strengths and weaknesses of methods of regulation for example price capping, monitoring of prices and performance targets  Be aware of various types of private sector involvement in public sector organisations, including contracting out, competitive tendering and public private partnerships (PPP/PFI) Today’s Lesson
    6. 6. Regulation of privatised industries
    7. 7. Objectives for this lesson  Explain the difference between RPI-X and RPI+K and be able to calculate the changes in price to the consumer  Understand the advantages of RPI-X and RPI+K compared to other methods of regulation, such as rate of return  Compare and contrast PPP and PFI  Explain the term Regulatory Capture
    8. 8. Introduction to privatisation  Privatisation is the sale of state owned assets to the private sector  Such industries tend to be natural monopolies with large fixed costs relative marginal costs, e.. Railways, gas, coal  A number of arguments have been used to justify privatisation including      Lower costs of production Increased choice Quality and innovation Wider share ownership Reduction in state borrowing and debt  Arguments against privatisation include concerns about  Monopoly pricing increasing  inequalities in society  Increasing externalities
    9. 9. Privatised industries can still be monopolies! Wherever possible, privatisation is also accompanied by measures to encourage competition Where not possible, or feasible to encourage competition, regulation was seen as the solution So instead of being under government control they came under government regulation
    10. 10. UK regulators Each of the privatised industries has its own regulator:  Ofcom – Telecommunications  Ofgem – Gas and electricity  Ofwat – Water  ORR – Rail  Their task is to ensure that no firm is able to abuse what monopoly powers it has to exploit customers
    11. 11. Methods of regulation Different ways they can achieve this: Increasing competition Prohibiting anti-competitive practices Monitoring pricing and price capping Setting minimum investment levels Monitoring performance Rate of return
    12. 12. Price capping / Price controls E.g. the does the regulator know at Problem:ifhow regulator believes that it is what level to year at Allow price possible to eachsetproductivity set increase achieve ‘X’? a rate gains of Price year, and The company knows better than the below the Retail 5% per Index: of the RPI is increasing at a rate of 10% per regulator…information asymmetry RPI-X (X-inefficiency) year, might reduce quality or neglect Companythe max price increase allowed in a year would be 10%-5%=5% The idea being that it forces companies to look investment… for productivity gains to eliminate x-inefficiency The X refers to the amount of productivity gain that the regulator believes can be achieved, expressed in terms of the change in average costs.
    13. 13. Price capping / Price controls Problem: if undertake expensive Force firms tothe regulator underestimates efficiency gains, then firms can be seen to investment: make excessive profits, often invested Firms can outside of the any profits from RPI+K (Capital)keepregulator’s remit. efficiency gains that the regulator has calculated as up quality of service K investment to bringreasonable. Usually in place for 5 years enabling Water: bring firms to plan ahead. to EU level standards up
    14. 14. Performance targets E.g. railways Trains within 5 minutes of advertised arrival Trains cancelled Water Number of leaks stopped
    15. 15. Rate of return The firm is limited on the rate of return it is permitted to make, thereby preventing it from making supernormal profits. This too may affect the incentive mechanism: the firm may not feel the need to be as efficient as possible, or it may waste profits on managerial perks to avoid declaring too high a rate of return
    16. 16. Regulatory capture A situation in which the industry regulator comes to represent a companies interests rather than the consumer The regulator becomes so closely involved with the firm it is supposed to regulate that it begins to champion its cause rather than impose tough rules
    17. 17. Objectives for this lesson  Explain the difference between RPI-X and RPI+K and be able to calculate the changes in price to the consumer  Understand the advantages of RPI-X and RPI+K compared to other methods of regulation, such as rate of return  Compare and contrast PPP and PFI  Explain the term Regulatory Capture
    18. 18. Public Sector – Private sector engagement Public Sector Contracting out Competitive tendering Private Sector Service or Venture Private sector firms bid for business
    19. 19. Public Sector – Private sector engagement Public Private Partnership E.g. PFI – Private Finance Initiative (launched in 1992) £ (PPP) A Govt service or private venture is funded and operated through a partnership Public Sector Private Sector The public sector outlines the services it requires Service / Venture The private sector then delivers by itself or jointly and is allowed to charge a return, e.g. a toll on a bridge, which is balanced with social welfare
    20. 20. PFI deals signed as at Sept 2001 ` N.B. As PFI switches focus toward efficiency and lower costs –concerns raised over quality of service By March 2008 more than 600 projects worth £60bln
    21. 21. Homework Read article on Gas & electricity supply Complete worksheet 37: Privatisation
    22. 22. Objectives for this lesson  Explain the difference between RPI-X and RPI+K and be able to calculate the changes in price to the consumer  Understand the advantages of RPI-X and RPI+K compared to other methods of regulation, such as rate of return  Compare and contrast PPP and PFI  Explain the term Regulatory Capture
    23. 23. Plenary Identify 3 ‘Anti-competitive’ practises What govt policy approaches would you suggest for each?

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