regulation of monopoly and competition policy

What is regulation?

 Rules set by government or their agencies that seek to control the operation of firms
who may have monopoly power in their own industry
 Regulation is designed to deal with the problem of market failure – where markets fail
to reach an optimal allocation of resources
 Monopoly power may lead to consumers being exploited (i.e. prices charged above the
true marginal cost of supply) – leading to excess profits being made by suppliers in the
market
 In terms of regulation of monopoly the government attempts to prevent operations
that are against the public interest – so called anti-competitive practices

Regulation and the Structure of the market

Problems occur when the market structure in a given industry becomes monopolistic – e.g. if a
merger or a take-over causes a firm to supply more than 25% of the market output (defined as a
working monopoly). Mergers are investigated by the Competition Commission.

Oligopolies can also lead to market failure – particularly if there is evidence of collusive
behaviour by the dominant businesses within an industry

The Competition Commission

The Competition is a public body established by the Competition Act 1998. Formerly known as
the Monopolies and Mergers Commission, it came into being on 1st April 1999

The Competition Commission has two main roles

1.   Reporting on referrals made by the Director General of Fair Trading, the DTI and the
main utility regulators

2.   Hearing appeals against prohibitions under the Competition Act 1998

European Competition Law

Articles 81 and 82 of the Treaty of Rome prohibits certain market practices deemed to be anti-
competitive and which act against the interests of consumers:

1.       Article 81 prohibits acts which damage competitiveness in a market

2.       Article 82 prohibits the abuse of a dominant position

New legislation comes into force from 1st March 2000 and the Competition Commission will
hear appeals against decisions made by regulators. Regulators and DGFT will carry out the
prohibitions. Regulators have the power to enforce prohibitions and to impose fines of up to 10%
of turnover

Prohibitions

These fall into two main categories

Anti-competitive agreements

 fixing purchasing and selling prices

 limiting production, technical development, investment
 sharing markets or supply sources
 applying different trading conditions to equivalent transactions

Abuse of dominant market position

 normally where a firm has over 40% of the market

 imposing unfair purchasing or selling prices

Referrals to the Competition Commission

A last ditch effort if the Director General of Fair Trading cannot remedy the problems

Tends to follow the merger business cycle (very strong at the moment!)

Agreement can be reached to rectify the offending area of conflict

 ITV companies were requested to reduce advertising sales contracts down

 BSkyB were refused the purchase of Man. Utd.

Regulating the Privatised Utilities

Gas

 British Gas privatised in 1986

 Creation of private utility company with substantial monopoly power
 Creation of Office of Gas Supply (OFGAS)
 Gas release programme to require BG to sell to other shippers at a price determined
by BG’s costs (1992)
 BG monopoly over supply below 25000 therms reduced to 2500 giving access to the
domestic market for other suppliers (1992)
 Divestment of vertically integrated businesses encouraged and happened in 1997 with
the creation of Transco (pipeline) and Centrica (supply)
 Expansion of competition for gas supply into the domestic market

Price regulation for Gas

BG is only allowed to increase its prices in line with a complex formula - the current restriction
expires on 31st March 2000. In the autumn of 1999, BG announced it was scrapping standing
chargesfor household gas users.

�         prices can go up if the RPI increases but only by a fraction of this

�         prices can go up in line with gas costs, minus a factor

�         prices can go up in line with costs of improvement in energy efficiency

�         This kind of restriction is known as an RPI-X formula

 Overall competition in the gas supply market is developing well.

 96% of customers are aware of their ability to choose an alternative gas supplier
 25% of customers have switched gas supplier – but over 75% of households have
remained with their original gas supplier
 The level of customer switching is continuing at about 32,000 per week
 The number of rival suppliers to BGT is well in excess of that required for competition
 Discounts of up to 20% compared to BGT’s tariffs available.
 Increasingly the gas and electricity supply markets are being characterised by ‘dual
fuel’ offers, with almost half of electricity and gas switchers supplied on ‘dual fuel’
contracts.

Ofgem (led by Callum McCarthy) remains concerned about the barriers to entry in the electricity
supply market, many of which it plans to address over the next eighteen months. However the
job of the regulator is changing away from monitoring the performance of the single privatised
utility – towards assessing the performance of a competitive market as a whole.

Reasons for low rate of switching

 Process required to switch supplier may be too difficult or complicated

 Difficult for consumers to get hold of easy to understand, unbiased price comparisons?
 Potential switchers are discouraged by stories about misselling, involuntary switching
or double billing

Stephen Byers, Secretary of State at the DTI (November 1999)

"The Government's policies are designed to put more power in the  hands of consumers. For
energy competition to work properly, markets must be genuinely open with strong, well-
informed customers. We have already secured for the UK the most open energy markets in the
world. Five million households have switched gas supplier, saving around �65 each, while in
electricity, four million have switched, saving around �20 a year each.

Telecommunications

British Telecom was privatised in 1984 although Mercury had been granted a licence in 1982
and began operating in 1983. The industry regulator OFTEL was established at the same time.
Initial regulation was a pricing formula of RPI-X, where X = 3% for the first 5 years
Competition was also encouraged with other operators e.g. in 1985 - Cellnet and Vodafone

Began at RPI - 3%

 1988 moved to RPI - 4.5%

 1991 increased to RPI - 6.25%
 1993 raised to RPI- 7%

Erosion of the duopoly between BT and Mercury - by 1996 there were over 100 local cable
operators and18 fixed link operators such as Energis and Ionica

Mobile telephone operators are now bidding for 5 new transmission licences

Developments in the market for telecommunications

 Average UK telecoms prices have fallen almost 50% in real terms in the last ten years
and competition has fostered the development and introduction of new services
 Telecommunications regulation is now being rolled back where competition has
provided consumer protection
 OFTEL will no longer promote competition where it considers the market is
competitive
 In markets where competition is not effective OFTEL will continue to promote
competition

Grateful acknowledgement is given to Roger Loxley from the Royal Grammar school,

Newcastle, in the preparation of these revision notes on monopoly regulation