Showing posts with label Competition policy. Show all posts

Ticket Touts

Some of the UK’s most prolific and successful ticket touts appear to be rebranding their organisations as the industry braces for investigations by the competition watchdog and the taxman in the UK.
Moves among touts to alter their public profiles follow increased scrutiny, including an inquiry by the Competition and Markets Authority (CMA) into whether they are breaking the law by failing to disclose their identity on ticket resale sites. HM Revenue & Customs (HMRC) is also examining the industry after MPs on the Commons culture, media and sport select committee demanded an inquiry into touts’ tax affairs.
The glare of publicity has prompted a flurry of activity among the most powerful operators, who have developed a stranglehold on tickets for in-demand events, such as an upcoming tour by U2 and the hip-hop musical Hamilton.
Andrew Newman, revealed as one of the UK’s most successful touts in an investigation by the Observer, has since changed his company’s name from Newman Corporation to North Financial Group (NFG) and has also deleted his Twitter account.

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Ticket resale websites and the touts who use them could be fined after the competition watchdog launched an investigation into how the best seats are harvested and then sold on at huge mark-ups before fans can buy them at face value.
The Competition and Market Authority said it was examining suspected breaches of consumer law after reviewing the four secondary ticket companies – Viagogo, StubHub, GetMeIn and Seatwave – that sell on previously purchased tickets.
It will examine several areas of concern in the secondary ticketing market, including whether touts use “connections” at resale websites to gain an advantage over fans, such as information that helps them decide which tickets to market aggressively.
The probe follows increasing scrutiny of the sector by MPs concerned about the inflated prices at which tickets are being sold. Earlier this month hundreds of tickets to see Adele next summer appeared on resale websites for up to £9,000, the latest in a string of in-demand events seized on by the UK’s most successful touts.

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Industrial Strategy

Trade unions, MPs and business leaders have questioned whether the government’s new industrial strategy will succeed if Britain leaves the single market in Europe, despite Theresa May pledging that it will create a platform for businesses to grow after Brexit.
The industrial strategy, unveiled in Warrington, Cheshire, shows the prime minister is prepared to take a more interventionist approach in British industry than previous governments.
The green paper states that five sectors will receive special government support because of their potential: life sciences, vehicles with low CO₂emissions such as electric cars, industrial digitalisation, the creative sector and the nuclear industry. Support could include help with trade deals, deregulation and the creation of new institutions to develop skills or research.

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Theresa May is to signal an era of greater state intervention in the economy as she launches her industrial strategy with a promise of “sector deals”, a new system of technical education and better infrastructure.
The prime minister will publish the strategy at a cabinet meeting in the north-west of England, naming five sectors that could receive special government support: life sciences, low-carbon-emission vehicles, industrial digitalisation, the creative sector and nuclear industry.
She will say the government would be prepared to deregulate, help with trade deals or create institutions to boost skills or research if any sector could show this would address specific problems.
The deals would be available only to sectors that organised themselves and made the case for government action, with May citing the automotive and aerospace industries as sectors that had successfully used this model.
Helping specific industries could be easier once Britain has left the EU because it may no longer be bound by state aid rules that restrict how governments of member states can support companies. The industrial strategy is also a marked change from the approach of the previous Conservative-led coalition, which took a more laissez-faire approach to the economy.

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Anti-competitive Parctices

Anti-competitive practices are business, government or religious practices that prevent or reduce competition in a market (see restraint of trade).

These can include:

Dumping, where a company sells a product in a competitive market at a loss. Though the company loses money for each sale, the company hopes to force other competitors out of the market, after which the company would be free to raise prices for a greater profit.
Exclusive dealing, where a retailer or wholesaler is obliged by contract to only purchase from the contracted supplier.
Price fixing, where companies collude to set prices, effectively dismantling the free market.
Refusal to deal, e.g., two companies agree not to use a certain vendor
Dividing territories, an agreement by two companies to stay out of each other's way and reduce competition in the agreed-upon territories.
Limit pricing, where the price is set by a monopolist at a level intended to discourage entry into a market. (Ex. Licensing)
Tying, where products that aren't naturally related must be purchased together.
Resale price maintenance, where resellers are not allowed to set prices independently.
Religious / minority group doctrine, where businesses must apply tribute to a significant (normally religious) part of the community in order to engage in trade with that community. (A business that does not comply will be 50% worse off than the competitor if they do not comply with the tribute demanded by just 20% of the community)

Also criticized are:

Absorption of a competitor or competing technology, where the powerful firm effectively co-opts or swallows its competitor rather than see it either compete directly or be absorbed by another firm.

Subsidies from government which allow a firm to function without being profitable, giving them an advantage over competition or effectively barring competition

Regulations which place costly restrictions on firms that less wealthy firms cannot afford to implement

Protectionism, tariffs and quotas which give firms insulation from competitive forces

Patent misuse and copyright misuse, such as fraudulently obtaining a patent, copyright, or other form of intellectual property; or using such legal devices to gain advantage in an unrelated market.

Digital rights management which prevents owners from selling used media, as would normally be allowed by the first sale doctrine.

Competition Policy in Markets and Industries

The main aims of competition policy are to promote competition; make markets work better and contribute towards improved efficiency in individual markets and enhanced competitiveness of UK businesses within the European Union (EU) single market.

Competition policy aims to ensure

Technological innovation which promotes dynamic efficiency in different markets
Effective price competition between suppliers
Safeguard and promote the interests of consumers through increased choice and lower price levels

There are four key pillars of competition policy in the UK and in the European Union

Antitrust & cartels: This involves the elimination of agreements that restrict competition including price-fixing and other abuses by firms who hold a dominant market position (defined as having a market share in excess of forty per cent)
Market liberalisation: Liberalisation involves introducing competition in previously monopolistic sectors such as energy supply, retail banking, postal services, mobile telecommunications and air transport
State aid control: Competition policy analyses state aid measures such as airline subsidies to ensure that such measures do not distort the level of competition in the Single Market
Merger control: This involves the investigation of mergers and take-overs between firms (e.g. a merger between two large groups which would result in their dominating the market)

Main Roles of the Regulators

Regulators are the rule-enforcers and they are appointed by the government to oversee how a market works and the outcomes that result for producers and consumers

The main competition regulator in the UK is the Competition and Markets Authority (CMA)

The European Union Competition Commission is also an important body for the UK

Examples of competition policy in action

De-regulation - laws to reduce monopoly power
- Preventing mergers/acquisitions that create a monopoly
- Laws to introduce competition into the postal services industry
- Forced sales of assets e.g. BAA and airports in the UK

Privatisation - transferring ownership
- Stock market floatation of the Royal Mail
- Part-privatisation of Network Rail similar to the sell-off of HS1 - the high-speed link that connects London's St Pancras to the Channel tunnel, on a long-term concession

Tough laws on anti-competitive behaviour
- Strong laws and penalties against proven cases of price fixing or collusion that involves market sharing
- Companies breaching EU and UK competition rules risk hefty fines of up to 10 per cent of global turnover - senior executives can be jailed

Reductions in import controls
- A reduction in import tariffs encourages cheaper products from overseas
- Increasing or eliminating import quotas can also have the same effect
- Allowing new countries into the European Union single market increases contestability

Source: Tutor2u

Competition Policy post-Brexit

Immediate implications of the Referendum result

As regards merger control, in the event that the UK does not reach an agreement that sees continued application of the EU Merger Regulation, then many deals will become subject to parallel review by the Competition and Markets Authority (CMA) in the UK, whereas previously they would have benefited from the “one stop shop” principle applicable to EU filings made in Brussels. The CMA’s approach is typically very thorough, and deals that are subject to such an approach may therefore face materially greater regulatory burdens.
Until the negotiation outcome is implemented, UK competition law will remain unchanged – both UK and EU competition and merger control law, as well as State aid law, will continue to apply in the UK. In many respects, UK competition law mirrors EU law in any event – particularly in cartel enforcement and abuse of dominance law. To this extent, the rules applicable to businesses will not change significantly, although who enforces them may do – and there may be less need to adopt a consistent approach with the way EU law develops in the future.
Bigger questions remain about what, if any, equivalent to current EU State Aid law would be enacted to apply in the UK, governing whether failing industries could be bailed out.
The current state of play (below) remains applicable until such a time as the UK leaves the EU/EEA.

Current state of play

EU competition law supports the completion of the EU-wide single market by providing a unified legal framework and common processes across the 28 member states.
The EU’s general antitrust rules prohibit cartel conduct and abuse of a dominant market position.
The European Commission and the national competition authorities (NCAs) of EU member states can investigate and impose substantial fines (up to 10 per cent of worldwide turnover) for breaches of these rules.
If the Commission or an NCA establishes that there has been a breach of EU antitrust rules, the parties concerned can be exposed to third-party actions for damages in national courts within the EU.
A new Damages Directive is being implemented across the EU, which is designed to further harmonise the approach of national judicial systems to such actions.
The EU Merger Regulation provides a one-stop shop for the regulation of proposed mergers, acquisitions or joint ventures involving companies operating in Europe (where the parties concerned meet certain worldwide and EU-wide thresholds).
‘State aid’ by member states, which can operate as a form of protectionism to the detriment of other undertakings or products, is tightly controlled as it has the potential to distort normal market competition.

What should I be thinking about now?

Given that the UK has adopted national legislation (the Competition Act and Enterprise Act) that run parallel to the EU provisions, a Brexit is unlikely to change the fundamentals of competition regulation in the UK.
Indeed in certain respects (eg in relation to private actions), the UK is a frontrunner, with many of the measures sought by the EU in its new Damages Directive (eg disclosure obligations) already a feature of UK law and procedure.
The adoption of the UK Consumer Rights Act in 2015, which establishes, among other things, an opt-out class action regime for competition damages, demonstrates an ongoing commitment at national level to effective competition regulation and enforcement.
As far as mergers are concerned, companies will still need to be cognisant of the EU thresholds and will remain subject to EU regulation in cross-border deals. In any event, if the UK were to remain part of the European Economic Area (EEA), post-Brexit, very little will actually change in terms of the obligations of UK undertakings, including in relation to merger control.
Nevertheless, a Brexit will inevitably raise substantive and procedural legal issues as the UK regime is decoupled from EU standards, processes and enforcement.

What could the position be following a Brexit?

The answers to many of the above questions would depend on the nature of a post-Brexit UK/EU relationship.
To give an idea of the range of possible outcomes, we have considered what the position would be under the ‘Norwegian option’ and the ‘World Trade Organisation (WTO) option’ – on the basis that these are at opposite ends of the spectrum of existing models for an alternative relationship with the EU.

The Norwegian option

Under the Norwegian option, the UK would join the European Free Trade Association (EFTA) and remain part of the EEA.
The UK would be bound by the EEA Agreement (which replicates the EU rules on competition law). The content of the competition law applied in the UK would remain broadly identical following Brexit.
The CMA and the UK courts would apply the equivalent rules under the EEA Agreement along with domestic UK competition law (which is heavily modelled on EU competition law).
A merger between a UK company and an EU company would still be susceptible to a merger review by the European Commission. Other mergers may still be subject to review by the EFTA Surveillance Authority (ESA) if they involve EFTA countries, although this has yet to happen in practice. The same concept applies to cartel and dominance cases: a UK company could be susceptible to a European Commission investigation if the relevant conduct occurred substantially in a EU member state rather than an EFTA state.
The enforcement powers of the EFTA Surveillance Authority are the same as those of the Commission.
In cartel cases where the Commission has jurisdiction, the Commission immunity and leniency regime applies to EFTA states as if they were EU states, meaning that EFTA states could approach the Commission directly. In cartel cases where the ESA has jurisdiction, the ESA has adopted a Leniency Notice. This echoes the Commission regime with the intention of ensuring uniform application of EEA competition law across EU and EFTA states. Therefore, the possibility of immunity from or a reduction in fines for cartelists would remain open under the Norwegian option.
EFTA states are subject to the EFTA Court, which is the EFTA equivalent of the Court of Justice of the EU. It deals with cases and appeals between the ESA and EFTA states, handles disputes between EFTA states and gives advisory opinions to EFTA states on the interpretation of EEA rules.

The WTO option

Under the WTO option, the UK would leave the EU without any free trade agreement in place. It would instead rely solely on rights and obligations under WTO rules.
The WTO does not have a formal competition regime. It does, however, continue to apply rules under the General Agreement on Tariffs and Trade in relation to state subsidies. These rules are similar to the EU state aid rules. However, the WTO regime is slightly narrower and may only be enforced by WTO member states (ie not by private parties directly). As such, the WTO regime is less interventionist than the EU rules.
Leaving aside state subsidy regulation, competition policy following Brexit would be determined at national level, potentially supplemented by bilateral trade agreements with competition-relevant provisions or protections.
There would, therefore, be the prospect of a dual track emerging – companies active in both the UK and the EU would be susceptible to regulation by both UK and EU authorities pursuant to separate UK and EU rules. In the absence of co-ordination between relevant regulators and courts, businesses may become subject to parallel filing obligations and could face parallel investigations that apply both potentially divergent legal standards and separate fines in relation to connected conduct. This clearly risks raising compliance issues and costs for businesses.

Merger Control

Merger control refers to the procedure of reviewing mergers and acquisitions under antitrust / competition law. Over 60 nations worldwide have adopted a regime providing for merger control. National or supernational competition agencies such as the EU European Commission or the US Federal Trade Commission are normally entrusted with the role of reviewing mergers.
Merger control regimes are adopted to prevent anti-competitive consequences of concentrations (as mergers and acquisitions are also known). Accordingly, most merger control regimes normally provide for one of the following substantive tests:

Does the concentration significantly impede effective competition? (EU, Germany)
Does the concentration substantially lessen competition? (US, UK)
Does the concentration lead to the creation or strengthening of a dominant position? (Switzerland)

In practice most merger control regimes are based on very similar underlying principles. In simple terms, the creation of a dominant position would usually result in a substantial lessening of or significant impediment to effective competition.
The large majority of modern merger control regimes are of an ex-ante nature, i.e. the reviewing authorities carry out their assessment before the transaction is implemented.
While it is indisputable that a concentration may lead to a reduction in output and result in higher prices and thus in a welfare loss to consumers, the antitrust authority faces the challenge of applying various economic theories and rules in a legally binding procedure.

Which mergers are examined by the European Commission?

If the annual turnover of the combined businesses exceeds specified thresholds in terms of global and European sales, the proposed merger must be notified to the European Commission, which must examine it. Below these thresholds, the national competition authorities in the EU Member States may review the merger. These rules apply to all mergers no matter where in the world the merging companies have their registered office, headquarters, activities or production facilities. This is so because even mergers between companies based outside the European Union may affect markets in the EU if the companies do business in the EU. The European Commission may also examine mergers which are referred to it from the national competition authorities of the EU Member States. This may take place on the basis of a request by the merging companies or based on a request by the national competition authority of an EU Member State. Under certain circumstances, the European Commission may also refer a case to the national competition authority of an EU Member State.

Corporate restructuring is a fact of life. There is a natural tendency for markets to consolidate over take through a process of horizontal and vertical integration.

The main issue for competition policy is whether a proposed merger or takeover between two businesses is thought to lead to a substantial lessening of competitive pressures in the market and risks leading to a level of market concentration when collusive behaviour might become a reality.

When companies combine via a merger, an acquisition or the creation of a joint venture, this generally has a positive impact on markets: firms usually become more efficient, competition intensifies and the final consumer will benefit from higher-quality goods at fairer prices.
However, mergers which create or strengthen a dominant market position can, after investigation, be prohibited in order to prevent ensuing abuses. Acquiring a dominant position by buying out competitors is in contravention of EU competition law. Companies are usually able to address the competition problems, normally by offering to divest (sell or off-load) part of their businesses. For example, in 2007, the UK Competition Commission decided that Sky would be forced to sell some of its 17.9% stake in ITV.

How Germany killed a merger

Here is the tactful statement from BAE Systems and EADS explaining why they have buried their plans to merge:

"Notwithstanding a great deal of constructive and professional engagement with the respective governments over recent weeks, it has become clear that the interests of the parties' government stakeholders cannot be adequately reconciled with each other or with the objectives that BAE Systems and EADS established for the merger."

Read more...

Competition and Markets Authority

This is the Competition and Markets Authority website

The Competition and Markets Authority (CMA) is a non-ministerial government department in the United Kingdom, responsible for strengthening business competition and preventing and reducing anti-competitive activities. The CMA launched in shadow form on October 1, 2013 and began operating fully on April 1, 2014, when it assumed many of the functions of the previously existing Competition Commission and Office of Fair Trading, which were abolished.
In situations where competition could be unfair or consumer choice may be affected, the CMA is responsible for:^[8]

^{Responsibilities}

investigating mergers
conducting market studies
investigating possible breaches of prohibitions against anti-competitive agreements under the Competition Act 1998
bringing criminal proceedings against individuals who commit cartels offences
enforcing consumer protection legislation, particularly the Unfair Terms in Consumer Contract Directive and Regulations
encouraging regulators to use their competition powers
considering regulatory references and appeals

OK but what do they actually do?

Monitoring and regulating prices: Regulators aim to ensure that companies do not exploit their monopoly power by charging excessive prices. They look at evidence of pricing behaviour and also the rates of return on capital employed to see if there is evidence of 'profiteering.' For example, recently the EU Competition Commission has enforced a number of cuts in the charges that can be made by mobile phone businesses when customers travel overseas. When setting price caps, regulators need to decide how much profit companies should be allowed to earn in exchange for the risks they are asked to take.
Standards of customer service: Companies that fail to meet specified service standards can be fined or have their franchise / license taken away. The regulator may also require that unprofitable services are maintained in the wider public interest e.g. BT keeping phone booths open in rural areas and inner cities; the Royal Mail is still required by law to provide a uniform delivery service at least once a day to all postal addresses in the UK
Opening up markets: The aim here is to encourage competition by removing or lowering barriers to entry. This might be achieved by forcing the dominant firm in the industry to allow others to use its infrastructure network. A key task for the regulator is to fix a fair access price for firms wanting to use the existing infrastructure. Fair both to the existing firms and also potential challengers. A good example to use here is the attempt in the UK to introduce more competition into the banking industry by encouraging the entry of challenger banks to compete against the large established commercial banking businesses.
The "Surrogate Competitor": Regulation can act as a form of surrogate competition – attempting to ensure that prices, profits and service quality are similar to what could be achieved in competitive markets. Fear of action by OFT and other regulators may prevent anticompetitive behaviour (i.e. there will be a deterrent effect)

Protecting the public interest
The key role of competition authorities around the world including the European Union is to protect the public interest, particularly against firms abusing their dominant positions
A firm holds a dominant position if its power enables it to operate within the market without taking account of the reaction of its competitors or of intermediate or final consumers.
An example of this happened in the summer of 2014 when the Competition and Markets Authority (CMA) recommended a full competition inquiry into UK retail banks claiming that the market for current accounts was not sufficiently competitive to work in the consumers' interest.

Recent news....

The competition watchdog has raised concerns that a takeover of a payments system by Mastercard could have an impact on the Link cash machine network.
The Competition and Markets Authority has given Mastercard a week to tackle its concerns that its takeover of Vocalink will restrict the number of companies able to provide systems to Link, which operates more than 70,000 automatic teller machines (ATMs) around the UK.
Andrea Coscelli, acting chief executive of the CMA, said: “The Link ATM network provides an essential service for millions of customers. It’s important that Link has a good choice of providers when it comes to supplying the necessary infrastructure so it can take advantage of the opening up of payment systems to competition.

Read more....

Natural Monopoly

A natural monopoly is a distinct type of monopoly that may arise when there are extremely high fixed costs of distribution, such as exist when large-scale infrastructure is required to ensure supply. Examples of infrastructure include cables and grids for electricity supply, pipelines for gas and water supply, and networks for rail and underground. These costs are also sunk costs, and they deter entry and exit.
In the case of natural monopolies, trying to increase competition by encouraging new entrants into the market creates a potential loss of efficiency. The efficiency loss to society would exist if the new entrant had to duplicate all the fixed factors - that is, the infrastructure.
It may be more efficient to allow only one firm to supply to the market because allowing competition would mean a wasteful duplication of resources.

Economies of scale

With natural monopolies, economies of scale are very significant so that minimum efficient scale is not reached until the firm has become very large in relation to the total size of the market.
Minimum efficient scale (MES) is the lowest level of output at which all scale economies are exploited. If MES is only achieved when output is relatively high, it is likely that few firms will be able to compete in the market. When MES can only be achieved when one firm has exploited the majority of economies of scale available, then no more firms can enter the market.

Utility companies

Natural monopolies are common in markets for ‘essential services’ that require an expensive infrastructure to deliver the good or service, such as in the cases of water supply, electricity, and gas, and other industries known as public utilities.
Because there is the potential to exploit monopoly power, governments tend to nationalise or heavily regulate them.

Regulators

If public utilities are privately owned, as in the UK, since privatisation during the 1980s, they usually have their own special regulator to ensure that they do not exploit their monopoly status.
Examples of regulators include Ofgem, the energy regulator, and Ofcom, the telecoms and media regulator. Regulators can cap prices or the level of return gained.

Railways as a natural monopoly

Railways are often considered a typical example of a natural monopoly. The very high costs of laying track and building a network, as well as the costs of buying or leasing the trains, would prohibit, or deter, the entry of a competitor.
To society, the costs associated with building and running a rival network would be wasteful.

Avoiding wasteful duplication

The best way to ensure competition, without the need to duplicate the infrastructure, is to allow new train operators to use the existing track; hence, competition has been introduced, without duplication of costs. This is called opening-up the infrastructure.
This approach is frequently adopted to deal with the problem of privatising natural monopolies and encouraging more competition, such as:

Telecoms, the network is provided by BT
Gas, the network is provided by National Grid (previously Transco)
Read more....

What is a natural monopoly?

For a natural monopoly the long-run average cost curve (LRAC) falls continuously over a large range of output. The result may be that there is only room in a market for one firm to fully exploit the economies of scale that are available

There are several interpretations of what a natural monopoly us

It occurs when one large business can supply the entire market at a lower price than two or more smaller ones
A natural monopoly is a situation in which there cannot be more than one efficient provider of a good. In this situation, competition might actually increase costs and prices
It is an industry where the minimum efficient scale is a large share of market demand such there is room for only one firm to fully exploit all of the available internal economies of scale
An industry where the long run average cost curve falls continuously as output expands
Private utilities are natural monopolies in local markets

The key point is that a natural monopoly is characterized by increasing returns to scale at all levels of output – thus the long run cost per unit (LRAC) will drift lower as production expands. LRAC is falling because long run marginal cost is below LRAC. This can be illustrated in the diagram above. There may be room only for one supplier to reach the minimum efficient scale and achieve productive efficiency.

Regulation of monopoly

The government may wish to regulate monopolies to protect the interests of consumers. For example, monopolies have the market power to set prices higher than in competitive markets. The government can regulate monopolies through price capping, yardstick competition and preventing the growth of monopoly power.

Why the Government regulates monopolies

Prevent excess price. Without government regulation, monopolies could put prices above. This would lead to allocative inefficiency and a decline in consumer welfare.
Quality of service. If a firm has a monopoly over the provision of a particular service, it may have little incentive to offer a good quality service. Government regulation can ensure the firm meets minimum standards of service.
Monopsony power. A firm with monopoly selling power may also be in a position to exploit monopsony buying power. For example, supermarkets may use their dominant market position to squeeze profit margins of farmers.
Promote competition. In some industries, it is possible to encourage competition, and therefore there will be less need for government regulation.
Natural Monopolies. Some industries are natural monopolies – due to high economies of scale, the most efficient number of firms is one. Therefore, we cannot encourage competition and it is essential to regulate the firm to prevent the abuse of monopoly power.

How the government regulate monopolies

1. Price capping by regulators RPI-X
For many newly privatised industries, such as water, electricity and gas, the government created regulatory bodies such as:

OFGEM – gas and electricity markets
OFWAT – tap water.
ORR – Office of rail regulator.

Amongst their functions, they are able to limit price increases. They can do this with a formula RPI-X

X is the amount by which they have to cut prices by in real terms.
If inflation is 3% and X= 1%
Then firms can increase actual prices by 3-1 = 2%

If the regulator thinks a firm can make efficiency savings and is charging too much to consumers, it can set a high level of X. In the early years of telecom regulation, the level of X was quite high because efficiency savings enabled big price cuts.
RPI+/- K – for water industry
In water the price cap system is RPI -/+ K.
K is the amount of investment that the water firm needs to implement. Thus, if water companies need to invest in better water pipes, they will be able to increase prices to finance this investment.

Advantages of RPI-X Regulation

The regulator can set price increases depending on the state of the industry and potential efficiency savings.
If a firm cuts costs by more than X, they can increase their profits. Arguably there is an incentive to cut costs.
Surrogate competition. In the absence of competition, RPI-X is a way to increase competition and prevent the abuse of monopoly power.

Disadvantages of RPI-X Regulation

It is costly and difficult to decide what the level of X should be.
There is danger of regulatory capture, where regulators become too soft on the firm and allow them to increase prices and make supernormal profits.
However, firms may argue regulators are too strict and don’t allow them to make enough profit for investment.
If a firm becomes very efficient, it may be penalised by having higher levels of X, so it can’t keep its efficiency saving.

2. Regulation of quality of service
Regulators can examine the quality of the service provided by the monopoly. For example, the rail regulator examines the safety record of rail firms to ensure that they don’t cut corners.
In gas and electricity markets, regulators will make sure that old people are treated with concern, e.g. not allow a monopoly to cut off gas supplies in winter.

3. Merger policy
The government has a policy to investigate mergers which could create monopoly power. If a new merger creates a firm with more than 25% of market share, it is automatically referred to the Competition Commission. The Competition commission can decide to allow or block the merger.

4. Breaking up a monopoly
In certain cases, government may decide a monopoly needs to be broken up because the firm has become too powerful. This rarely occurs. For example, the US looked into breaking up Microsoft, but in the end the action was dropped. This tends to be seen as an extreme step, and there is no guarantee the new firms won’t collude.
5. Yardstick or ‘Rate of Return’ Regulation
This is a different way of regulating monopolies to the RPI-X price capping. Rate of return regulation looks at the size of the firm and evaluates what would make a reasonable level of profit from the capital base. If the firm is making too much profit compared to their relative size, the regulator may enforce price cuts or take one off tax.
A disadvantage of rate of return regulation is that it can encourage ‘cost padding’. This is when firms allow costs to increase so that profit levels are not deemed excessive. Rate of return regulation gives little incentive to be efficient and increase profits. Also, rate of return regulation may fail to evaluate how much profit is reasonable. If it is set too high, the firm can abuse its monopoly power.

6. Investigation of abuse of monopoly power
In the UK, the office of fair trading can investigate the abuse of monopoly power. This may include unfair trading practises such as:

Collusion (firms agree to set higher prices)
Collusive tendering. This occurs when firms enter into agreements to fix the bid at which they will tender for projects. Firms will take it in turns to get the contract and enable a much higher price for the contract.
Predatory pricing (setting low prices to try and force rival firms out of business)
Vertical restraints – prevent retailers stock rival products
Selective distribution For example, in the UK car industry firms entered into selective and exclusive distribution networks to keep prices high. The competition commission report of 2000 found UK cars were at least 10% higher than European cars