As indicated in Section 1.2, regulation is an instrument of policy. Regulation takes second place to competition [1]. Competition is a desirable goal not for its own sake, but because of the benefits from competition. These benefits derive from the pressure competition places on firms to be efficient, innovative and customer focused in order to thrive and survive. They include lower prices, higher productivity, more service choices, and greater connectivity. Competition is held to be the most efficient mechanism available for organizing, operating, and disciplining economic markets [2].
Competitive markets distribute resources efficiently and fairly without any need for a single centralized controlling authority. Competition maximizes benefits to society at large by increasing:
- Allocative efficiency – which refers to the optimal allocation of resources to meet consumer demand.
- Productive efficiency - which is achieved when resources are used to produce output at lowest cost
- Dynamic efficiency – which refers to changes in efficiency over time. It is generally regarded as being promoted where producers have incentives to invest and innovate to meet future consumer demand.
Regulation acts as a surrogate for competition where competitive forces are weak (eg in forcing monopolies to reduce prices and increase output) or where there are significant externalities. Where regulation is a proxy for competition, the notions of efficiency above are used as a guide to regulatory decisions; subject to policy.
Note that there may be a trade-off between the long-term dynamic efficiency objective (investment) and the short-term allocative efficiency objective (lower prices). Regulators are faced with a complex balancing exercise. Individual regulatory decisions need to balance:
- The long term objective of ongoing, sustainable competition, and
- The resolution of immediate short-term concerns, while
- Complying with the legislative provisions under which regulators operate.
Using regulation to make markets more competitive must be done very carefully. The impact of the regulator on competition may not be what was intended. Regulators may be tempted to micromanage the market to ensure that competition (or a particular form of competition) takes place. Alternatively, they may decide prematurely that the market is fully competitive. Neither of these paths is likely to result in sustainable competition.
Regulators have to be wary of rent-seeking [3] and aim for principled, consistent and predictable decision-making. A good example of best-practice is Ofcom’s approach to regulation which emphasises regulatory forbearance in its operations; relying on markets where possible and operating with a bias against intervention [4]. Where intervention is required, Ofcom aims to intervene firmly and promptly, using the least intrusive regulatory mechanisms available. It has seven “regulatory principles”.
ENDNOTES
[1] There are different degrees or forms of competition. See Forms of Competition.
[2] See also Jamaica: The Benefits of Mobile Competition.
[3] Rent seeking is on-market behaviour to seek competitive advantage. For example, lobbying for protection or monopoly rights would be rent-seeking.
[4] Regulatory forbearance is about regulating only where it is needed, and withdrawing regulation in those parts of the market where it is no longer necessary. In other words, the concept of regulatory forbearance rests on the goal of a gradual removal of ex ante regulation and an accompanying increase in the use of general ex post competition regulation. It is particularly important to be cautious about regulating rapidly innovating sectors; eg M-Pesa. See also Regulatory Forbearance in Canada.