T C D M . S C . ( E P S ) – R O N A N L Y O N S –

E C 8 0 1 5 C O M P E T I T I O N & R E G U L A T I O N

WEEK 12: COMPETITION & REGULATION: REVIEW

STRUCTURE

Review Sessions

1. Recap of Module

2. Exam Questions

2

RECAP MT1: REASONS TO REGULATE

• Ultimate goals of efficiency and equity

• Proximate goals/instruments of: employment, price stability,

competitiveness, living standards, social justice

• Understanding regulation involves mixing 'standard

micro'/deductive with 'behavioural nuance'/inductive

• Distortions (and market failure) as the basis for government

intervention

• Externalities, public goods, monopoly power (exog, endog),

risk/uncertainty, imperfect information

• In PPF (efficiency) terms, regulation should be either shifting

out PPF or getting us on to the frontier

3

RECAP MT1: METHODS OF REGULATION

• Externalities: regulate, tax/subsidy, moral suasion, allocate property rights

• Public goods: direct provision, private (under public

regulation), mixed

• Exogenous monopoly power (IRTS): regulation, public

ownership, trade policy/FDI

• Endogenous monopoly power (behaviour): regulation,

competition policy, trade policy

• What about monopoly power due to government regulation?

• Risk/uncertainty (moral hazard, adverse selection, principal-

agent problem): regulate, public provision (risk pooling),

public information

• Imperfect information: regulation, provision of information

4

RECAP MT2: WHAT, WHY & HOW

• What is regulation?

• Economic/direct (e.g. about price/investment/entry/ownership;

often sector-specific) vs. social (health, safety, env, fairness; broad

not specific)

• Why to (not) regulate? (Market failure vs. regulatory capture)

• Market failure as necessary but not sufficient condition for

regulation: what are costs of intervention (as well as benefits)?

• Public choice theory: regulation a good similar to others; who

supplies/demands it?

• "Taxation by regulation" - where politicians maximise likelihood of

re-election, regulation will favour concentrated winners over

diverse losers... note also length of regulatory protection

• E.g. of pharma 1996-2001: rent-creating restrictions on new

pharmas

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RECAP MT2: WHAT, WHY & HOW

• Three core questions: • Why regulate?

• Which instrument?

• What are the consequences?

• Should be viewed through both market failure

(benefits of reg) and public choice (potential

costs/consequences) lenses

• How to regulate?

• Minister vs. independent

• Move towards latter: less conflict of interest; greater

regulatory certainty…

• … but accountability vs independence

6

RECAP MT3: WHAT WORKS?

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Intervention/ Market Failure

Remove

barriers to entry

Price and

quality regulation

Mandatory

insurance or USO

Mandatory Standards

Publication

or labelling rules

Market Power

Externalities

Imperfect Information

RECAP MT3: RIA

• Regulatory Impact Assessment • What is the policy problem? What is the market failure?

• What alternatives are there to regulation?

• What are regulations main costs/benefits [policy costs, compliance costs, admin costs, competition effects, distributional effects]

• What might be unintended effects?

• RIA involves its own cost/benefit analysis • Note: lack of ex-post review in Ireland

• Formal RIA steps:

1. Describe context, objective, options

2. Identify costs, benefits, other impacts

3. Apply significance filter

4. Further analysis if required

5. Consultation

6. Enforcement and compliance issues

7. Review

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RECAP MT4: WHAT IS A MARKET?

• Spectrum from PC to Monopoly

• Where is price relative to MC?

• Signs of market power:

• Define the market: what happens if p increases? Demand substitution? Supply substitution?

• How concentrated? HHI/Gini/Concentration ratio

• Barriers? Natural, strategic, exogenous, endogenous; is

there a minimum viable/efficient scale?

• Competitive environment? Coordinated price effects?

• Efficiencies from a merger? If this is the argument, the

burden of proof is on the merging parties

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RECAP MT5: HORIZONTAL & VERTICAL

• Competition policy: typically sets diffuse potential

beneficiaries against concentrated potential losers

• E.g. taxi licences

• Is market contestable?

• If so, why intervene (other than to potentially further reduce

barriers)?

• Horizontal (substitutes) vs. vertical (complements) –

up/downstream • Positive welfare effect of merger where both up- and downstream

are monopolist

• Much more ambiguous in case of restraints on pricing/distribution

(without merger) – e.g. vertical price fixing, exclusive

distribution/purchasing, price discrimination

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RECAP MT7/8: BANKING/SECTORAL

• Banking regulation:

• Why? Rationale in systemic risk, info asymmetry (and fraud)

• How? Deposit insurance (who pays?), micro-prudential

(governance, risk management), and macro-prudential (stability

of entire system)

• 2003-2008 system: separate Central Bank and Financial Regulator –

principles-based, rather than rule-based (lack of macro-

prudential)

• MT8: Overview of sectoral regulation

• Economics of price regulation: avoid price being too high or too

low

• Selected sectoral issues

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RECAP MT7/8: PUBLIC OWNERSHIP

• Public ownership:

• Why sell state assets? Budget stability – pay down debts? Or

to pay for (transitional?) current spending?

• What are they? Tangible (semi-states) vs intangible (mineral right, trademarks, radio spectrum) – typically non-traded,

often infrastructural

• What has policy been? Privatisation programme since 1991

– raising €6.3bn net 1991-2006 (Eircom biggest chunk); 2011-2015 has yielded ~€2.5bn (gross)

• What are policy options? Maximise revenue; hold minority

share; or recall market failure – what is rationale? Still

relevant?

12

STRUCTURE

Review Sessions

1. Recap of Module

2. Exam Questions

13

SECTION A: Q1

• “Ireland’s system of economic or direct regulation

of household waste collection lacks a clear

rationale, needlessly raises collection costs and

creates negative externalities. A better alternative

exists.” Discuss.

14

SECTION A: Q2

• In the upcoming General Election a new party, the

“Centre Party”, in its draft Manifesto, Promoting

Growth and Efficiency, currently states under Public

Ownership: “Public ownership good, private

ownership bad.” You have been asked, based on

the available evidence and drawing on your

economics expertise, to develop a more nuanced

Manifesto wording on the issue of public ownership

(50 words max) and provide a set of

accompanying speaking notes (roughly 1200-1400

words) justifying the position.

15

SECTION B: Q3

• The evolution of markets over time reflects external

changes (such as technology or regulation) and

internal changes (behaviours of participants in the

market). Consider any two of the markets that

formed part of the Presentation Exercise in

November. Contrast the evolution of competition in

both markets, focusing on the drivers of change

and the potential or actual role of policy in the

process.

16

SECTION B: Q4

• Explain how market structures in upstream and

downstream markets need to be taken into

account in how policymakers should act to

promote competition. In your answer, use US,

European or Irish examples and consider both the

long and short term consequences of changing

market structures.

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SECTION C: Q5

• Set out a brief regulatory impact analysis for ONE of

the following hypothetical measures, outlining each

step that would be required to complete the

analysis including identification of possible

alternatives:

• A rule that all lenders must pass through changes in base

rates fully and promptly to retail variable rate mortgage

customers from the date of enactment onwards. This would be in response to public outcry about margins on non-

tracker loans.

• A restriction on retail pricing of alcoholic beverages,

imposing a minimum price per unit alcohol content. This

would be motivated by health and other social policy

concerns about excessive alcohol consumption. 18

SECTION C: Q6

• Price regulation can improve or harm societal

welfare. Discuss the circumstances when it may be

beneficial or harmful, making reference to real-

world examples. How can the choice of price

regulation method affect the risks associated with

such regulatory measures?

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SECTION D: Q7

• Dun Laoghaire Rathdown County Council recently

introduced a requirement that new homes must be

built to low-energy passive house standards. Assess

the likely impact of this regulation on (a) the Dublin

housing market, (b) social equality, and (c)

environmental outcomes. What information would

you require to decide for or against such a

proposal?

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SECTION D: Q8

• An international financial services transaction tax

has been proposed by some. Discuss its rationale

and its likely benefits and costs, using the EU map of

regulatory impacts. Based on your understanding of

Ireland’s trading sector, what impact might this

have on Ireland’s international competitiveness?

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