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) RegulationSocial (Conduct) RegulationAdministrative Regulation

We concentrate on regulations relating to competition and protecting consumers.

Why might we regulate?PlanningNatural MonopolyDistributive and Social JusticeMarket Failure

Types of Market FailurePublic 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

Low Price

High 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 InstitutionsEuropean Parliament and Council of

MinistersEuropean CommissionDGIVArticles 81 and 82Merger 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 regulationOverall Consumer GainsManufacturingTelecommunications and UtilitiesAir TransportUniversal Service

ReflectionTake some time to think through the

issues.Do the required reading.Complete the activities associated with

this lecture.