An Introduction to regulation, it ’ s significance and rationale Kevin Hinde

Introduction  Regulations dominate all aspects of our private and organisational lives and we have to work with regulatory environments and the policies that shape future rules, laws and regulatory institutions.  The world is constantly changing and organisations need to understand regulatory frameworks in order to formulate and implement strategies.

A Definition of Regulation  “ refers to the various instruments (both formal legal instruments and such informal tools as ‘ guidance ’ ) used by government to control some aspect of the behaviour of a private economic actor. Regulation can also include rules issued by non-governmental bodies (e.g. self-regulatory bodies) to which governments may have delegated regulatory powers. All regulations are supported by the explicit threat of punishment for non- compliance. ” OECD, 2001.

Types of regulations  Economic (Structural) Regulation  Social (Conduct) Regulation  Administrative Regulation  We concentrate on regulations relating to competition and protecting consumers.

Why might we regulate?  Planning  Natural Monopoly  Distributive and Social Justice  Market Failure

Types of Market Failure  Public Goods.  Externalities.  Information Asymmetries.  Market Dominance and the Abuse of a Dominant Position.

Using Game Theory to explain regulation Company 1 Company 2 Low Price High Price Alter the payoff to (1, 1) by imposing fines of £2m each on the cartel (2, 2)(4, 0) (0, 4) (3, 3)

How much regulation?  should occur as long as the marginal benefits equal the marginal costs of intervention, but the data problems involved are enormous.  ‘ Competition where possible, regulation where necessary ’. A political Judgement?  It should look to improve allocative, productive and dynamic economic efficiency.  Does this always require the state?  Property Rights and Public Choice views  How about self-regulation?

Competition Institutions

European Institutions  European Parliament and Council of Ministers  European Commission  DGIV  Articles 81 and 82  Merger Regulation

UK Institutions  Office of Fair Trading  Sector Regulators  OFWAT, OFGEM, OFTEL,  Competition Commission  Fair Trading Act 1973  Competition Act 1998  Chapter I Prohibition  Chapter II Prohibition

Principles of good regulation  Independence  Accountability  Transparency  Clarity  Speed  Appeals Procedure  Simplicity  Periodic Review  Consistency  Commitment  Fairness  Targeted

Some potential benefits of good regulation  Overall Consumer Gains  Manufacturing  Telecommunications and Utilities  Air Transport  Universal Service

Reflection  Take some time to think through the issues.  Do the required reading.  Complete the activities associated with this lecture.