Access and quality of service

Each of the above techniques refers to ways by which the regulator can prevent

abuse of monopoly power in the form of excessive charges to the consumer and

excessive profits. But monopoly power can also be curbed by determining the conditions of access to the service or sector. For example, in the case of network operators in electricity, gas, telecoms or air transport, the monopolist has an obvious

incentive to provide access to its network on unfavourable terms. To counteract

this, the regulator must devise and open a fair and transparent licensing scheme

for new entrants. Considerable research has gone into establishing how access

charges for connection to networks should be determined. The efficient component

pricing rule has been developed to deal with such situations. It provides that

new entrants must pay an amount to cover the marginal cost of access to the

network plus some contribution towards fixed costs of setting it up which were

borne by the original state firm. This rule has many flaws, and there is no simple

rule of thumb for determining the relevant fixed and marginal costs. Another

factor here is that some providers may have universal service obligations, i.e. an

obligation to provide a minimum set of services of specified quality to all users at

an affordable price. The regulator must also have regard to the quality of service

offered by existing and new operators to the consumer and by the network owner

to competing operators. The existing operator must not be allowed to favour its

own downstream  arm over competitors. Finally, there is usually provision

for complaints procedures and for the development of customer charters.

    The above considerations demonstrate that regulation may be necessary, and

better than no regulation, but it is by no means costless. Regulators do not come

cheaply. They need large staffs of economists and lawyers. Regulators can be of

variable quality and regulatory capture is an ever-present danger. Their decisions

can always be subject to long and expensive appeal, just as in the case of competition law. Regulation cannot be considered a satisfactory substitute for

competition. The high cost of imposing regulation underlines the importance

of competition as an alternative, more efficient, policing device for curbing

excessive profits. In short, the best regulator will often be one that succeeds in

making itself redundant. Over time, emphasis must be placed on deregulation

and exposure to international competition as the most efficient way forward.

    When thinking of competition most businesses see their problem as one of excess

competition, not a lack of it. This is understandable from the perspective of an

individual firm already established in an industry. Competitive pressure has

increased in most economies. But the notion of competition being ‘excessive’ sits

uneasily with economic thinking on the role of free markets. Competition affords

opportunities for new firms to enter the industry. From these firms’ perspective,

the problem may appear one of too little, not too much competition.

Competitive pressure, however, gives firms an incentive to search more vigorously

for ways of protecting their domestic market, by developing market niches

and, if necessary, by circumventing competition legislation. As a result, new

entrants to an industry can be deterred by unfair trade practices, and financially

weaker firms can be discriminated against in the process, unless protected by law. The consumer, too, can suffer discrimination as larger firmsbuild up their war chests and tighten their hold on their market share. In short,competition policy is still needed.Competition policy should aim to be transparent, easy to implement and predictable. The need for case-by-case assessment, taking account of each market’s special features, can result in complex legal cases and much uncertainty.

    Competition policy is not a flawless set of precepts which can impose competition

in a costless way. It can be expensive and inefficient to enforce and can

be subverted and distorted. Yet, for all that, the secretary general of Unice,

the federation of European industry, reflected the weight of business opinion in

his assertion that the essential corollary of competitiveness [is] strong competition

policy.

    State-owned enterprises in formerly nontraded sectors of the economy – telecoms,transport, energy and public utilities – have become a focus for competition

policy in recent years. These enterprises were once regarded as ‘natural’

monopolies, but thinking has changed. Governments have become convinced

of the efficiency gains that can be obtained through a more market-oriented

framework. The European Commission has been particularly active in promoting

competition in these sectors through the use of competition law.

    Competition policy has been further bolstered by setting limits on the amount

of state aid provided by EU Member States to various industrial and regional initiatives.This type of action is welcomed by the weaker Member States because

they are unable to afford the cost of matching the subsidies offered by richer

Member States. The EU’s strategic policy to favour competition is also evident in

its support for SMEs.

    A degree of tension between competition and industrial policy is to be

expected. Prior to the Second World War, cartelisation was seen as a way of building up more efficient and technically progressive industries in Germany and

Switzerland. Japan also had a tradition of looking with suspicion on ‘excessive’

competition because of its possible detrimental effects on an industry’s capacity

to exploit fully the economies of scale. According to one authority, the Japanese

authorities feared ‘excessive’ competition as much as monopoly as a potential

source of inefficiency._14 Their predilection for limiting competition and encouraging

mergers, vertical and horizontal firm groupings, and inter-firm operating

agreements, has been fundamentally at odds with anti-trust policy. In the case of

the automobile industry, for example, the Ministry for International Trade and

Industry sought to limit production to one firm and, failing that, a target

of ‘at most’ three firms was set. It proved impossible to restrict competition in this

way, however. The vigorous competition between domestic firms that prevailed

in postwar Japan proved to be an important source of vitality for the Japanese

economy. Yet, to this day, some countries maintain a more tolerant approach to

cartels than would be countenanced by most European countries. Keeping the

domestic market contestable often entails an element of compromise between

the objective of avoiding market dominance and allowing a technically efficient

size of firm.