Market Structure

Response Rating:

• Currently 1/5 Stars.
• 1
• 2
• 3
• 4
• 5

1 stars with 1 vote

Click above to rate this response.

[Response by Sophie Trémolet and Diane Binder, October 2009]

Liberalization of markets traditionally associated with natural monopolies has given rise to a dilemma of institutional policy: more than one agency may be involved in formulating and enforcing competition law. This is partly due to the fact that in sectors with a strong monopoly element, regulation via price controls is often regarded as a temporary phenomenon pending the arrival of sufficient competition. When this happens, the question arises of whether the competition aspects of utility regulation should be integrated into the broader powers and responsibilities of the competition authority and removed from the sector regulator, or whether both agencies should collaborate on competition issues.

Deciding on the allocation of functions between the competition authority and the sector regulator usually depends on the extent to which competition without price regulation has been achieved. For example, there is usually greater deference to the role of the competition authorities in the telecommunications sector where competition is more advanced. In the European context, for example, the EU Commission's Directorate General for Competition plays a significant role. Whilst the United States has relied primarily on sector-specific rules applied by sector-specific institutions, New Zealand relied until 2001 almost exclusively on antitrust (i.e. competition) law and Australia, Chile and the United Kingdom chose a combination of both.

If competition responsibilities are shared between these two types of agencies, this raises the issue of how such collaboration can be organized and managed, as discussed here. In short, the role of each institution should be defined as clearly as possible so as to avoid duplication, jurisdictional uncertainty and turf disputes.

When they are two different institutions, competition authorities and sector regulators usually share responsibility for ensuring market competitiveness. In practice, competition authorities tend to have an ex-post role of policing competition, responding to misbehaviors that have already occurred, while sector regulators have more of an ex-ante role of promoting competition, i.e. they act to prevent anticompetitive behavior¹ in the day-to-day conduct of regulatory activities.

The difference in role leads to differences in primary functions. The competition authority is generally concerned with all sectors and has four main functions²:

• To remedy anti-competitive conduct, such as collusion and to control the ability of the incumbent to restrict competition;
• To ensure that industry mergers do not significantly decrease competition: in the electricity sector for instance, mergers and acquisitions may seek to reaggregate functions of electricity supply industry, such as generation and distribution, that reform has sought to disaggregate in order to promote competition. An active merger control policy may be the only effective remedy against market power in a number of situations.
• To protect consumers from anti-competitive practices.

Because the functions of sector regulator and competition authority are so closely related, the regulator can use its sector expertise to complement the competition authority's effort in a number of ways:

• The sector regulator may complement the competition authority in designing ex-ante rules that will support the competition authority's goals and facilitate its role as a watchdog.
• The sector regulator may share its sector expertise with the competition authority in cases where it has no jurisdiction but simply good sector knowledge. For instance, sector expertise may be useful for the competition authority when investigating mergers or anticompetitive conduct, or when evaluating the impact of a proposed market structure. In this view, benchmarking information gathered over time by the sector regulator or the knowledge of a firm's historic anti-competitive behavior is valuable to the competition authority. The competition authority may also be insufficiently sensitive to specific features of a given sector, for example their social or service obligations, particularly when the balance between regulation and competition has not decisively tipped over the latter. In some cases, a member of the competition authority may also be a member of the sector regulator, or the agencies make formal submissions to proceedings conducted by the other.
• The sector regulator may also collaborate with the competition authority when their functions overlap. It may be the case for investigating a proposed merger when the sector regulator has responsibility for issuing licenses, or for consumer protection. In the United Kingdom, the process of deciding who deals with a particular complaint appears to work well, with the OFT (Office of Fair Trading) generally passing cases over to a sector regulator or the Competition Commission (depending on the case) if the complaint involves a regulated sector. Cooperation between the OFT and the sector regulators is facilitated by the existence of the Concurrency Working Party (CWP), a forum in which views on current practice are exchanged.
• The sector regulator can assist with ensuring that the competition authority's rulings are effectively enforced. The competition authority alone is unlikely to enforce antitrust rules: competition law enforcement processes are slow and imperfect and the incumbent operator can also use legal processes to delay enforcement decisions that would offset its advantage relative to new entrants. In such a case, the sector regulator may offer a more flexible and less burdensome approach to regulating competition³.

Related Questions

• Regulator role – What is the appropriate role of regulators in the implementation of a new market structure and in evaluating / mitigating the impact of such changes?
  • Promoting Competition – What are the different ways to promote competition in a utility sector and what can be the regulator's role in doing so?
  • Competition oversight – What can be the role of the regulator in designing rules that limit anti-competitive behavior by the incumbent operator?
  • Competition Authorities – What are the potential functions of competition authorities and how can they collaborate with sector regulators?
  • Assessing Market Power – What is the best factor to use to determine market share and assess dominance?
  • What are key market structure issues in the water sector?

Footnotes

1. Anticompetitive behavior is a behavior that aims to reduce competition and protects a firm's market power or position, such as abuse of dominance, refusal to supply, cross-subsidization, misuse of information and predatory pricing. Back to Content
2. Refer to Chapter 1 Section D in the BoKIR. Back to Content
3. The interaction between sector-specific powers and competition powers raises a number of important policy questions. In the United Kingdom, some of the regulators see advantages in using sectoral regulation where there is a choice, because it is seen to be better targeted at the particular regulated activity concerned; enforcement involves a less burdensome appeals process; is less resource-intensive; and is more easily implemented. In contrast, Ofcom stated that they would normally favor investigating a case under the Competition Act 1998 (Competition Act) if at all possible, as a matter of policy and (in some instances) law. Ofgem also stated that relying on competition law is more appropriate as markets become competitive. Back to Content