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