competition policy- monopoly regulation

• What does RPI stand for in the context of price regulation?

  Rate of inflation
• RPI is considered a relatively fair price control because it allows firms to cover their costs
• RPI-X allows firms to increase prices below the rate of inflation.
• RPI+K is used in the water industry to allow for capital investment
• What is the purpose of the X in RPI-X price regulation?

  Reduce price increases
• K in RPI+K can be negative to reduce prices below RPI.
• What is the goal of effective price regulation in terms of prices and quantities?

  Lower prices, higher quantities
• Effective price regulation aims to set prices at the allocatively efficient level
• What is one problem with price regulation related to information?

  Lack of perfect information
• If X in RPI-X is set too high, it may lead to firms shutting down.
• Why might regulatory bodies reduce the value of X in RPI-X over time?

  To encourage efficiency savings
• Regulatory capture occurs when regulators prioritize industry interests over the public interest
• Regulatory capture can undermine the effectiveness of competition policies.
• Performance targets in the NHS may lead to doctors taking shortcuts
• What is a common example of quality control targets in the UK?

  Train delay limits
• Train companies may extend journey times to avoid exceeding delay targets.
• What equation is used in profit regulation?

  Costs + rate of return
• Profit regulation aims to cover costs and provide a rate of return on capital employed
• Monopolists have an incentive to overreport costs under profit regulation.
• Taxing monopoly profits shifts the marginal cost curve upward
• Why might taxing monopoly profits not be effective?

  Reduces innovation
• Taxing monopoly profits can lead to tax evasion by firms.
• What is a common merger policy used by competition authorities?

  Selling off stores
• A merger policy may require firms to sell off outlets in areas where competition is distorted
• Privatization is a market-liberalizing policy aimed at promoting competition.
• What is one key evaluation point for monopoly regulation?

  Imperfect information
• If regulation is too strict, it may lead to firms shutting down.
• The costs of regulation can outweigh its benefits if regulatory capture occurs.
• Why might regulating a natural monopoly be counterproductive?

  Wasteful duplication