Transcript Regulations
Regulations By Emily, Steph and Sarah What are regulations Regulations are rules that are enforced by an authority. In terms of a monopoly they seek to control these firms, preventing firms form acting against pubic interest. How regulations work Regulations limit the allocation of resource responsibility that a firm has. This is monitored by the government or other authorities. This means that the there is third party control over the firm to help avoid conflict. Regulations are often enforced via fines. Advantages and Disadvantages Advantages Disadvantages For natural monopolies it means that there is Hard to find evidence of anti-competitive little competition, allowing for greater profits. behaviour. Reduce market failure, negative externalities. Fear of fines or other control means that there is strong incentive to conceal collusion. Increased safety and protection for consumers and producers. Regulations can be difficult to set and expensive for the government to monitor and enforce. Reduces demerit goods and services Makes the market less contestable -acts as a barrier to entry for some markets-reducing competition. Red tape- conformity to rules which may hinder decision making. Reducing efficiency. Reduce the power of monopolies- using regulating bodies to set rules such as price capping. Types of regulations Price Capping: This is when regulators set price controls. Rate of Return: Developed in the US as a method of regulating average price of private utilities e.g. water, electricity and gas supply. Allows firms to cover their costs of operation and therefore earn a ‘fair’ rate of return on the typical capital invested. This is based on the typical rate of return which is expected from a competitive market. Windfall Taxes: Regulators imposing a tax on excessive profits of privatised utilities. Yardstick Competition: If direct competition between agents is low or absent. Compulsory Competitive Tendering (CCT): Makes public utilities and government departments more efficient by cutting costs and also improving efficiency. Self-Regulation: A code of conduct must be established though; whereby the members of the industry must agree to abide by. Breaking up a monopoly: If the firm has become too powerful, the government can decide to break it up, although this rarely occurs. An example being BAA London Airports Monopoly. Evaluate the extent to which regulations of private monopolies and oligopolies will be beneficial to consumers and the economy as a whole Introduction: Definitions of regulation, oligopoly and monopoly and examples of monopolistic/oligopolistic markets in the UK Regulation: Rules that are enforced by an authority (eg. a government). Used to control the activities of producers & consumers and change undesirable behaviour;reducing market failure and its impacts. Monopoly: A single firm in a market.(Google and Tesco as they have more than 25% market share are said to be monopolies, with 90% and 30% market share respectively) (eg, cable company in America) Oligopoly: A market structure dominated by a few firms.eg operating systems for smart phones (Apple iOS, Google Android), Airline Industries, Pharmaceuticals Characteristics of monopolies and oligopolies that require regulation Monopoly: Restrict consumer sovereignty Charge higher prices/price discrimination Reduce consumer surplus and economic welfare Predatory or limit pricing Net welfare loss Less employment Oligopoly: Reduced consumer choice Cartel-like behaviour reduces competition Creation of artificial barriers to competition including Predatory & limit pricing to force rivals out of the market Collusion Macroeconomic effects of unregulated monopolies/oligopolies Unregulated monopolies/oligopolies Unemployment Restricted output requires less labour Inflation Raising prices when there is no increase in demand or rising costs inflation may occur. Welfare Rise in price reduces consumer surplus Deadweight welfare loss/social cost of monopoly Loss of productive and allocative efficiency resulting in higher unit costs. In the UK, monopolies can be formed via a merger between firms, when firms have patents, if a firm has the exclusive use of a scarce resource- such as BT who own the telephone cabling running into the majority of UK homes/businesses- or when governments grant a firm monopoly status, such as the Post Office before it was privatized. In an oligopolistic market, a few firms hold most of the market share. This can result in collusion rather than competition, leading to a monopoly-like effect, with equivalent effects on consumers and the economy Use of regulation The UK government has 4 key pillars of competition policy designed to increase competition and reduce anti-competitive practice such as price fixing. This protects consumers, workers and the macro economy from the mal effects of monopolistic/oligopolistic market structures. Regulatory bodies are industry specific and are appointed by government to enforce the rules and oversee how the market works & the outcomes for producers and consumers. Cartel elimination: removal of price-fixing and competition eliminating measures Market liberalization: introduction of competition in previously monopolistic sectors (such as aviation and telecommunications) State aid control: analysis of state aid to ensure that it does not distort competition e.g. Cyprus Airways (the country’s national carrier) received £50m in government aid between 2007 and 2013, allowing them to gain an unfair advantage over rivals Merger control: investigation of mergers between large firms to ensure a monopoly is not formed Specific examples of regulation and how it benefits consumers/the economy Price capping Where price controls are set e.g. In the UK competition regulator, the Office of Fair Trading (OFT), has a price capping system for natural monopolies like gas and water. This price capping involves tying prices to just below the current general inflation rate. Lower prices for consumers which is especially beneficial in the energy and water sectors which are fixed costs for people. Lower prices will increase disposable income amongst the majority of consumers (because the monopoly is the only supplier) which will translate to increase aggregate demand. This is particularly relevant at this time of extremely low bank rates, encouraging consumption over saving. Tough anti-competitive practice laws will have the same effect as price capping Collusion & collusive tendering Firms in an oligopoly agree to set higher prices and/or fix the bid at which they will tender for contracts so firms take it in turn to get contracts. Lowest price possible for consumers which maximizes welfare and encourages increased consumption which is currently useful for tackling low inflation rates. Breaking up a monopoly Introduction of competition will improve quality and incentivize operators to be responsive to customers and airlines Firms won’t be able to fix output at lower levels so can produce as close to full capacity as possible, with an increase in GDP likely and potential improvements in the positioning of the balance of payments due to a rise in exports (more relevant for export-orientated monopolistic/oligopolistic industries) Shift outwards in the PPC Advantages of regulations Monopolies Oligopolies Protected from competition, monopoly firms may undertake product or process innovation to derive higher profits. Only firms with monopoly power are in the position to be able to innovate effectively. Highly competitive strategy, allowing them to generate similar benefits to more competitive market structures, e.g. lower prices. Few firms, making the market uncompetitive, behaviour may be highly competitive. Natural monopoly (gas, rail etc.) breaking up the market structure would waste competitive supply. All or most of the available economies of scale have been derived by one firm. Having more than one firm would be a wasteful duplication of scarce resources. Dynamically efficient in terms of innovation and new product and process development. The super-normal profits they generate may be used to innovate, in which case the consumer may gain. Monopolists can also generate export revenue for Price stability helps consumers plan ahead and a national economy. A single firm may gain from stabilises their expenditure, which may help economies of scale in its own domestic economy stabilise the trade cycle. and develop a cost advantage which it can exploit and sell relatively cheaply abroad. Conclusion: The extent to which it benefits consumers and the whole economy because it is taking on individual firms and sectors, it will have a smaller impact on the UK economic health as a whole than it will do on individual consumers and their spending habits. Elaborate on this and possibly include another example The End