Public Policy: Using Market-Based Approaches - Department for ...

Public Policy: Using Market-Based Approaches
IMPLEMENTATION ISSUES
The main implementation issues in providing access to natural monopolies are:
● excessive intervention;
● asymmetric information between the regulator and monopolist; and
● the costs of regulation.
The first issue arises because requiring access can reduce incentives for firms to
invest in new assets. For this reason intervention has generally been limited to
a small number of sectors, which in the UK are almost exclusively former
nationalised industries.
The second issue arises because the regulator will know less about the firm than
its own managers. This issue can be particularly important in setting access
charges and other terms and conditions, where asymmetric information can
lead to the setting of sub-optimal access fees. It can also lead to the firm inflating
its costs, particularly in the period immediately before any review of its access
charges.
The third issue is in part a consequence of the asymmetric information issue.
That problem leads to the need for a well-resourced regulator and significant
burdens on regulated firms in terms of the monitoring and reporting of
information on costs and quality of services. This burden can create significant
costs of regulation. The process of opening up access, which may involve the
restructuring of businesses to separate monopoly from competitive functions
and the introduction of new systems to facilitate open access, can also lead to
one-off and ongoing costs.
All these factors need to be balanced against the benefits of opening up markets
to greater competition.
CONCLUSION
Opening up access can bring the benefits of competition in terms of incentives
for efficiency and innovation to the non-natural monopoly elements of an
industry. However, it can also reduce the incentives for the monopoly element to
undertake investment, and asymmetric information may expose regulators to
the potential for capture. The evidence outlined above suggests that in some
industries, the resulting efficiency savings dominate the costs of regulation.
However, ensuring the emergence of genuine competition in the contestable
elements of the unbundled monopoly is crucial to realising the potential
benefits, highlighting the importance of competition. This market mechanism is
not considered in our case studies since there is already an extensive literature
documenting the success of the mechanism, for example in the regulation of
privatised network industries in the UK.
68