Public Policy and Monopolies
The British Experience
Too Little Competition
and Market Failure
• 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
Structural Reasons forMarket Failure
• 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 er by the dominant
businesses within an industry vidence of collusive
behavior
Anti-Competitive Behavior
• 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
British Gas Utility
• 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
Regulating Prices
• 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 charges for 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
Results
• 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.
British Telecom
• 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
BT Results
• 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