1. Competition policy in the UK
Monopolies and
Efficiency

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. 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. Measures aimed at enhancing
competition
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. 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 partnerships
Today’s Lesson (PPP/PFI)

6. Regulation of privatised
industries

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. 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. 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. 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. 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. 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. 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. Performance targets
E.g. railways
Trains within 5 ins of
advertised arrival
Trains cancelled
Water
Number of leaks stopped

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 incentive
mechanism: the firm may not feel the
need to be as efficient as possible, or
it may waste profits on managerial
perks to avoid declaring too high a
rate of return

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. 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. Public Sector – Private sector
engagement
Public Sector
Contracting out Competitive tendering
Private Sector Private sector firms
bid for business
Service or Venture

19. Public Sector – Private sector
engagement Public Private Partnership
£ (PPP) A Govt service or
E.g. PFI – Private Finance private venture is funded
Initiative (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. PFI deals signed as at Sept 2001
By March
2008 more
Includes than 600
channel projects
tunnel rail worth
link £60bln
N.B. As PFI switches focus
toward efficiency and lower
costs –concerns raised
over quality of service

21. Homework
Read article on Gas & electricity supply
Complete worksheet 37: Privatisation

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. Plenary
Identify 3 ‘Anti-competitive’ practises
What govt policy approaches would you
suggest for each?