Govt Regulation (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
  • Govt Regulation (regulation of privatised industries)

    1. 1. Competition policy in the UKMonopolies and Efficiency
    2. 2. Your taskGovernments have a range of anti- monopoly 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, On the other hand, monopolists and many natural monopolies are imperfectly competitive firms far more efficient than (Oligopolies) may exploit the any alternative market, earning abnormal competitive market profits at the expense of structures. There may or consumers, reducing output may not be a link and increasing price. This between monopoly and leads to welfare loss. innovation.
    4. 4. Measures aimed at enhancingcompetitionGovernments have a range of anti- monopoly 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  Explain why governments may enhancing competition intervene to encourage between firms and their impact competition, or prevent on prices, output and market monopolies and mergers structure Compare and evaluate the  Be aware of various types of strengths and weaknesses of private sector involvement in methods of regulation for public sector organisations, example price capping, including contracting out, monitoring of prices and competitive tendering and performance targets public private partnershipsToday’s Lesson (PPP/PFI)
    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  Arguments against been used to justify privatisation include concerns privatisation including about  Lower costs of production  Monopoly pricing increasing  Increased choice  inequalities in society  Quality and innovation  Wider share ownership  Increasing externalities  Reduction in state borrowing and debt
    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 Problem:ifhow regulator believes that it is E.g. the does the regulator know atAllow price possible to eachsetproductivity set increase achieve ‘X’? a rate what level to year at below the Retail 5% per Index: of the RPI gains of Price year, and The company knows better than the is increasing at a rate of 10% per regulator…information asymmetryRPI-X (X-inefficiency) Companythe max price increase allowed year, might reduce quality or neglect 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Force firms tothe regulator underestimates Problem: if undertake expensive efficiency gains, then firms can be seen to investment: make excessive profits, often investedRPI+K (Capital)keepregulator’s remit. outside of the any profits from Firms can efficiency gains that the regulatorK investment to bringreasonable. has calculated as up quality of service 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 ins 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 incentivemechanism: the firm may not feel theneed 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 its interests rather than regulating it 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 sectorengagement Public SectorContracting out Competitive tendering Private Sector Private sector firms bid for business Service or Venture
    19. 19. Public Sector – Private sector engagement Public Private Partnership £ (PPP) A Govt service or E.g. PFI – Private Finance private venture is fundedInitiative (launched in 1992) and operated through a partnership Public Sector Private Sector The private sector then delivers by itself or jointly The public sector outlines and is allowed to charge a the services it requires return, e.g. a toll on a bridge, which is balanced Service / Venture with social welfare
    20. 20. PFI deals signed as at Sept 2001 By March 2008 more Includes than 600 channel projects tunnel rail worth link £60blnN.B. As PFI switches focustoward efficiency and lower costs –concerns raised over quality of service
    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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