Understanding Regulation: Theory, Strategy, and Practice

By Robert Baldwin; Martin Cave | Go to book overview

16
Regulation versus Competition

1. Competition and its Virtues

Competition involves rivalry among firms for the customer's business across all the dimensions of the service-price, quality, and innovation. Its opposite is a situation in which a single firm can effectively act independently of any competitors and impose a particular offering on the market place. Inevitably, competition is a matter of degree rather than something which is either fully present or absent. Industries differ in their structure, ranging from the situations where there is a multiplicity of small producers, through more concentrated markets with a small number of larger producers (and sometimes a competitive fringe) to the state of monopoly. The degree of rivalry encountered also depends upon firm behaviour, which ranges from out-and-out competition in all dimensions of the service, through more limited forms of competition in which, for example, firms compete in terms of quality but not in terms of price, to openly or tacitly collusive or parallel behaviour in all the dimensions of service provision.

As a method for obtaining the best deal for consumers, detailed regulation is seen by many to be inferior to systems allowing competition subject to the safeguards of general competition law. Thus Steven Littlechild, in his 1983 report for the British Government on price controls for BT, wrote: 'Competition is by far the most effective means of protection against monopoly. Vigilance against anti-competitive prices is also important. Profit regulation is merely a "stop-gap" until sufficient competition develops.'1

Hence springs the expression: competition is the best regulator. Underlying this proposition is the belief that firms have the strongest incentives to give customers what they want in terms of price and quality of

____________________
1
S. Littlechild, Regulation of British Telecommunications Profitability ( London, 1983), 1; see also OFTEL's arguments in favour of control via competition and consumer protection rules as opposed to regulation by means of prescriptive licence conditions: OFTEL, Second Submission to the Culture, Media and Sport Select Committee ( London, Mar. 1998); see also M. Grenfell, "'Can Competition Law Supplant Utilities Regulation'" and M. Bloom, "'The Impact of the Competition Bill'", both in C. McCrudden (ed.), Regulation and Deregulation ( Oxford, 1999).

-210-

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Understanding Regulation: Theory, Strategy, and Practice
Table of contents

Table of contents

  • Title Page iii
  • Acknowledgements v
  • Contents vii
  • Figures ix
  • Tables x
  • Abbreviations xi
  • I- Introduction 1
  • 1- FUNDAMENTALS 7
  • 2: Why Regulate? 9
  • 3: Explaining Regulation 18
  • 4: Regulatory Strategies 34
  • 5: Who Regulates? Institutions and Structures 63
  • 6- What is 'Good' Regulation? 76
  • 7- The Cost-Benefit Testing Of Regulation 86
  • 8: Enforcing Regulation 96
  • 9: Setting Standards 118
  • 10: Self-Regulation 125
  • 11: Regulating Risks 138
  • 12: Regulation in the European Context 150
  • 13: Regulatory Competition and Coordination 180
  • 14: British Utilities Regulation 190
  • II- PARTICULAR CONCERNS 201
  • 15: Price Setting in Natural Monopolies 203
  • 16- Regulation Versus Competition 210
  • 17- Price-Capping Mechanisms 224
  • 18- Measuring Efficiency: Benchmarking, Yardsticking, and Performance 239
  • 19: Regulating Quality 248
  • 20: Franchising and its Limitations 257
  • 21: Accountability 286
  • 22: Procedures and Fairness 314
  • 23- Conclusions 334
  • Bibliography 337
  • Index 359
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