Discuss regulation and why it is important and sometimes necessary to maintain a competitive market

The following essay will discuss regulation and why it is important and sometimes necessary to maintain a competitive market. Regulation is fundamentally a rule that controls something so that it functions properly.

The essay will describe monopolies and oligopolies and explain why regulating these two types of market structures is important to maintain a competitive market.

The essay will discuss the five privatised industries in the U.K, telecommunications, water, gas, railways and electricity and explain how regulation is used to help maintain a competitive market.

Relevant books and journals have been used to help support what has been written.

To conclude the essay will summarise all its findings and give an overall opinion on why regulation is important for maintaining a competitive market.

The need for regulation in industries is imperative, it helps to protect the consumer against firms who may sometimes exploit them and it is necessary to regulate monopolies and oligopolies.

“Monopolies are market structures where there is only one firm in the industry” (Sloman, p120:2001)

An example of regulating a monopolistic practice would be, a manufacturer being prevented from fixing the price that retailers charge, or from refusing to supply certain retailers. (Sloman, 2000)

This is very important as it prevents firms from using there market power in an exploitive way.

“Oligopoly is a market structure where there are few enough firms to enable barriers to be erected against the entry of new firms”

(Sloman, p120:2001)

An example of why regulation in oligopoly is important would be to prevent an oligopolistic collusion; this is where firms conspire to determine the price and/or output. (Worthington et al, 2001)

Firms will sometimes combine to exploit their joint power and make bigger profits which can keep new firms from entering the market, making there less chance for competition. This is why regulation is important; it stops firms from doing this and maintains a competitive market.

There are five major privatised industries in the U.K, each have there separate regulatory offices:

Telecommunications – OFTEL (Office of Telecommunications)

Gas – OFGAS (Office of Gas Supply)

Water – OFWAT (Office of Water Services)

Electricity – OFFER (Office of Electricity Regulation)

Railways – ORR (Office of Rail Regulation)

Source: (Sloman, p365:2000)

In these five cases there are natural monopolies like the power lines, national grid, pipelines and rail track. There is still the opportunity for a competitive market in these areas so to increase competition in these privatised industries the regulatory bodies have tried to introduce ways where various companies can enter the market. The first is franchising, this is where they grant operators a license for a certain period of time, and this has been used on railways where specific routes have been given to a company. (Sloman, 2001)

This would create a competitive market in terms of the awarding of the franchise because companies would not only pay a lot of money but would try and provide the best service.

Another way has been to try and grant all companies equal access to the relevant grid. By law all gas suppliers are given access to British gas pipelines at the same prices. (Sloman, 2000)

Even though actions have been taken to try and create a competitive market in these privatised industries it is still evident that British Gas, National Power and other leading firms dominate there markets and still have enormous market power.

All of these five industries have price setting formulae, ‘RPI minus X’. This means that the industries can raise their prices by the rate of increase in the retail price index (RPI) minus a certain percentage (X) to take account of expected increases in efficiency. The industry is then supposed to pass cost savings on to the consumer. (Sloman, 2001)

An article in the Daily Mirror newspaper wrote that electric companies National Power and Powergen had purchased there supply of electricity 20% cheaper than the previous year, yet the general public did not receive the same savings.

(Daily Mirror, May 2003)

This emphasises the fact that more regulation needs to be empowered to create a more competitive market within these privatised industries.

If there was more of a competitive market these savings would have been given for the reason that the company would be trying to attract customers, as it is there are no competitors so the company can charge what it wants.

Conclusion

It is evident that regulation has helped to maintain a competitive market. If there was no regulation in the privatised industries companies like British Gas and BT would dictate prices and control supply, knowing they were the dominant companies and had no competition. Although there are regulatory bodies enforcing certain rules it is evident these companies still have great market power and are still dominating there markets.

In monopolies and oligopolies it is very important that regulation be imposed, this is to help other firms enter markets in the case of oligopolies and also to make sure firms don’t abuse their market power in the case of monopolies.

Regulation helps smaller firms enter markets where they once were not able to get into. This improves the chance of a competitive market because there is more of a choice for the customer, instead of one price there are a range.