Competition Policies - Monopoly Regulation

• Price regulation


  Prices not allowed to be increased the next year beyond RPI (rate of inflation)
• RPI minus X price regulation

  Restricts the level by which firms can increase their prices below RPI, where X represents a percentage
• RPI plus/minus K

  Enough profits can be made to allow for capital investment, where K represents a percentage
• If X is set too high


  It may lead to firms shutting down or not making enough profit to sustain their operation
• If X is set too low


  It may not get the competitive outcomes that this regulation is supposed to promote
• If K is set too high


  It might get outcomes that are not competitive
• If K is set too low

  It might not get the level of profits being made to sustain capital investment
• Investigating firms and setting the levels of X and K is very costly and time-consuming for regulatory bodies</b>
• There is a risk of regulatory capture, where owners/managers of firms become friends with regulators and stop regulation being strict enough
• Quality control/performance targets


  Regulations on things like train delays, gas/electricity supply cuts, and NHS waiting times
• Quality control/performance targets can lead to unintended consequences, such as companies gaming the system
• Profit control/profit regulation

  Regulating profits by covering costs and adding a percentage rate of return on capital and labour
• Profit regulation can lead to distortions, such as monopolists over-reporting costs and over-employing capital to increase the regulated profit level
• Taxing monopoly profits is not effective, as it increases costs and prices for consumers
• Merger policy can involve breaking up mergers that create monopoly outcomes, or forcing the sale of outlets in certain locations
• Privatisation, deregulation, and reducing trade barriers are policies to promote competition
• Key evaluation points for monopoly regulation include: information issues, costs vs benefits, and regulatory capture leading to government failure
• Over-regulation can also lead to the loss of benefits of monopolies, such as dynamic efficiency