1. Competition policy in the UK
Monopolies and
Efficiency

2. Your task
Governments have a range of antimonopoly 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,
monopolists and many
imperfectly competitive firms
(Oligopolies) may exploit the
market, earning abnormal
profits at the expense of
consumers, reducing output
and increasing price. This
leads to welfare loss.
On the other hand,
natural monopolies are
far more efficient than
any alternative
competitive market
structures. There may or
may not be a link
between monopoly and
innovation.

4. Measures aimed at enhancing
competition
Governments have a range of antimonopoly 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
enhancing competition
between firms and their impact
on prices, output and market
structure
 Explain why governments may
intervene to encourage
competition, or prevent
monopolies and mergers
 Compare and evaluate the
strengths and weaknesses of
methods of regulation for
example price capping,
monitoring of prices and
performance targets
 Be aware of various types of
private sector involvement in
public sector organisations,
including contracting out,
competitive tendering and
public private partnerships
(PPP/PFI)
Today’s Lesson

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
been used to justify
privatisation including





Lower costs of production
Increased choice
Quality and innovation
Wider share ownership
Reduction in state borrowing
and debt
 Arguments against
privatisation include concerns
about
 Monopoly pricing increasing
 inequalities in society
 Increasing externalities

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
E.g. the does the regulator know at
Problem:ifhow regulator believes that it is
what level to year at
Allow price possible to eachsetproductivity set
increase achieve ‘X’? a rate
gains of Price year, and
The company knows better than the
below the Retail 5% per Index: of the RPI
is increasing at a rate of 10% per
regulator…information asymmetry
RPI-X (X-inefficiency)
year, might reduce quality or neglect
Companythe max price increase allowed
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
Problem: if undertake expensive
Force firms tothe regulator underestimates
efficiency gains, then firms can be seen to
investment:
make excessive profits, often invested
Firms can
outside of the any profits from
RPI+K (Capital)keepregulator’s remit.
efficiency gains that the regulator
has calculated as up quality of service
K investment to bringreasonable.
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 minutes 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 a companies interests
rather than the consumer
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
Service or Venture
Private sector firms
bid for business

19. Public Sector – Private sector
engagement
Public Private Partnership
E.g. PFI – Private Finance
Initiative (launched in 1992)
£
(PPP) A Govt service or
private venture is funded
and operated through a
partnership
Public Sector Private Sector
The public sector outlines
the services it requires
Service / Venture
The private sector then
delivers by itself or jointly
and is allowed to charge a
return, e.g. a toll on a
bridge, which is balanced
with social welfare

20. PFI deals signed as at Sept 2001
`
N.B. As PFI switches focus
toward efficiency and lower
costs –concerns raised
over quality of service
By March
2008 more
than 600
projects
worth
£60bln

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?