Regulatory Policy

Economic regulation is sometimes necessary in situations where markets fail to function effectively and the role of regulatory policy is to address the sources of market failure and to protect standards and utlimately the users of the markets.

Regulatory policy is related to competition policy in that both are broadly directed towards ensuring the effective functioning of individual goods and services markets.  A difference between the two is that regulation has more permanency: competition policy tends to be applied to markets temporarily (for one or a few years, depending on the specific competition characteristics of particular markets) whereas regulation is usually an ongoing feature of markets where regulatory intervention is necessary. 

A significant development in recent years is that regulatory policy has become more competition-based.  For example, the regulatory concept of SMP (significant market power) is equivalent to the competition law concept of dominance, in which an undertaking is basically immune from competitive pressure, whether from existing rivals, potential entrants, customers or ultimately consumers.  For regulated companies, competition-based regulation implies that the degree of regulation has the prospect of being eased where there occurs an improvement in competition (reflecting the economic principle “competition where possible, regulation where necessary”).  This may be good or bad for a regulated firm: ‘good’ because it means lighter-touch regulation; ‘bad’ in the sense that the firm may face more pressure and uncertainty from the enhanced competitive position characterising the market in which it was previously dominant.

Competition-based regulation is generally seen by economists as a positive development.  However, where this modern form of regulation is applied inappropriately or poorly understood, or not properly designed, its effects can be potentially catastrophic.  In the wake of the international banking crisis, which erupted around the world in 2008, financial market regulation is set to become significantly more stringent.  In respect of other economic markets where regulation is warranted, including energy, water and telecommunications markets, it is likely that economic regulation will veer towards a more cautionary approach, meaning more stringency in the next number of years.

PMCA is active in all areas of regulatory policy, including:

  • Provision of evidence that market failure actually exists – to help assess the necessity or otherwise of economic regulation and thereby inform the rationale for regulation
  • Assessment of SMP – in markets where regulation may be warranted or where regulatory and other economic developments may imply a relaxation of existing economic regulation
  • Review of price controls – including their effects on investment incentives as well as on consumers and rivalry behaviour
  • Analysis of non-price regulation – for example, quality of service regulation
  • Economic analysis of special markets – including network markets and two-sided markets which may require specific regulation
  • Special topics in regulatory economics – for instance, price/margin squeeze and addressing regulatory issues in respect of government disposals of public/state assets
  • Responses to consultations – this includes the provision of economic analysis on behalf of regulated entities in response to consultations by national regulatory authorities (NRAs)
  • Regulatory impact assessment (RIA) – this is an important part of ‘better regulation’ and aimed at assessing the unintended or unforseen effects that can sometimes accompany new laws, regulations or policies in economic markets.