SHEPHERDING FIRMS WITH SHEPHERDING FIRMS WITH MARKET POWER: WHAT IS - PowerPoint PPT Presentation

“SHEPHERDING” FIRMS WITH “SHEPHERDING” FIRMS WITH MARKET POWER: WHAT IS MARKET POWER: WHAT IS THE BEST WAY TO DO IT? THE BEST WAY TO DO IT? David K David K Round Round Pr Profess ofessor of Economics and Direct r of Economics and Director or Centre for Regulation and Market Analysis Centre for Regulation and Market Analysis University of Sout University of South Australia h Australia ACCC Regulatory Confer Regulatory Conference ence Evaluating the Effect Evaluating the Effectiveness of iveness of Regulation Regulation Gold Coast, Queensland, July 2 Gold Coast, Queensland, July 29-30 2004 -30 2004

The Shepherd’s Flock The Shepherd’s Flock • Access pricing – Access pricing – getting it right etting it right – “aggressive” regulation: to/for whom? “aggressive” regulation: to/for whom? – innovation innovation – pricing rules pricing rules – type 1 and type 2 errors of regulation type 1 and type 2 errors of regulation • What is effective competition? What is effective competition? – structural or behavioural indicia structural or behavioural indicia – does the number of firms matter? does the number of firms matter? – dynamic efficiency considerations dynamic efficiency considerations – competitive parity competitive parity – demand side considerations demand side considerations 2

Wethering the storm Wethering the storm • Type 1 regulatory errors: Type 1 regulatory errors: reject a reject a socially acceptable price socially acceptable price – a cost to the regulated firm and a loss to a cost to the regulated firm and a loss to society society • Type 2 regulatory errors: Type 2 regulatory errors: approve a approve a socially damaging price socially damaging price – a cost to consumers a cost to consumers • The costs of getting it wrong The costs of getting it wrong – regulatory regulatory – commercial commercial – consumer/social consumer/social 3

Driving the mob Driving the mob • The goals of access pricing The goals of access pricing – public interest public interest • consumers consumers • producers producers – choice choice – efficiency efficiency • Which competitive framework? Which competitive framework? – perfect competition perfect competition – workable/effective competition (“loose workable/effective competition (“loose regulation”) regulation”) 4

Driving the mob (cont) Driving the mob (cont) • What kind of framework? What kind of framework? – allocative v allocative versus dynamic efficiency rsus dynamic efficiency – “innov “innovation is supr tion is supremely important” emely important” • Building blocks Building blocks – regulatory straig regulatory straightjackets htjackets – is there one “right” price? is there one “right” price? – how to allow room for err how to allow room for error • Pricing specificity: a tough call Pricing specificity: a tough call – “compar “comparable retur ble returns” s” – is there a socially is there a socially accept acceptable range? able range? – what is “re what is “reasonably generous”? sonably generous”? – can the regulator accept what firms claim? can the regulator accept what firms claim? – should it? ould it? 5

Driving the mob (cont) Driving the mob (cont) • Traditional focus on supply side Traditional focus on supply side issues issues – the need for foresight the need for foresight • What can history tell us in the What can history tell us in the future? future? – the need for follow-up the need for follow-up 6

A battering ram for A battering ram for regulation? regulation? • Signals versus incentives Signals versus incentives • Confrontation or conciliation? Confrontation or conciliation? • Carrots and sticks: motives for Carrots and sticks: motives for innovation and allocative innovation and allocative efficiency efficiency – “real pressure” to make progress “real pressure” to make progress occur occur • Pass-through problems Pass-through problems – progress reports progress reports 7

Who is being fleeced? Who is being fleeced? • Do consumers of access-controlled Do consumers of access-controlled services have any choice? services have any choice? – who should provide this? who should provide this? – how ofte how often? n? – with what protection? with what protection? • The role of price-service offerings The role of price-service offerings – putting regulated firms to a market test putting regulated firms to a market test – remember what the Trade remember what the Trade Practices Practices Tribunal said in Tribunal said in QCMA QCMA • Making firms responsive to market Making firms responsive to market forces in the absence of (m)any forces in the absence of (m)any rivals rivals – the degree of regulatory aggression the degree of regulatory aggression – the learning curve the learning curve 8

Who’s pulling the wool Who’s pulling the wool over our eyes? over our eyes? • What is the real policy objective What is the real policy objective in access pricing? in access pricing? • Implementation difficulties Implementation difficulties • Should economists be given a Should economists be given a large WACC? large WACC? • Is there one single correct Is there one single correct access price? access price? • A process of evolution in policy A process of evolution in policy and learning – and learning – it is early days t is early days yet yet 9

Dealing with the Dealing with the breakaways breakaways • What do firms really want? What do firms really want? • The need for regulatory follow- The need for regulatory follow- up up • Do regulators’ attitudes and Do regulators’ attitudes and methods need to change? methods need to change? • Is there a one-size-fits-all model Is there a one-size-fits-all model of access pricing? of access pricing? • Temporal/dynamic Temporal/dynamic considerations considerations 10

Mustering the ideas Mustering the ideas • Advocacy dvocacy • Corporations orporations • Consumers onsumers • Co-operation o-operation • Numbers of firms umbers of firms • Competitive outcomes ompetitive outcomes • Compliance ompliance 11

Concluding round-up Concluding round-up • Goals and means must be carefully Goals and means must be carefully identified identified • Focus on dynamic market-specific Focus on dynamic market-specific behavioural outcomes, not numbers behavioural outcomes, not numbers of firms of firms • Flexibility is paramount Flexibility is paramount • Give consumers a chance to bleat Give consumers a chance to bleat • Keep in mind the trade-off between Keep in mind the trade-off between the interests of consumers and the interests of consumers and legitimate business interests legitimate business interests 12