Domande svolte di Market Regulation - Economics and Finance

Regarding the competition laws, it aims to prevent damaging practices like the predatory price practice, the

abuse of dominant position, the comparative advertising and so on, by facilitating the efficiency in the market

and preventing the market failures. This strategy can be seen as a complement of C&C one, because it leaves

the companies free of acting, by respecting such standards that are not specific and the amount of laws may be

lower avoiding the over-regulation phenomenon. Nevertheless, there are concerns that should be taken into

account by the public authorities. First of all, the solutions to market issues may need high technical

knowledge, such that guidelines established by an overseeing technical agency may be the right choice,

depending on the issues difficulty. Moreover, it may be difficult for the public agency to understand who’s the

creator of the harmful action affecting the market stability, given that it is able to create negative externalities

propagating to the other market participants. Eventually, since the market moves fast to adequate itself with

the consumers’ preferences, but the competition laws is often slow and key issues may be left hidden from the

public administration point of view.

The franchising is a strategy applied when the market is characterised by a natural monopoly or that tends to

a monopolistic power. In particular, the public agency tries to make it similar to a competitive market in terms

of output achieved and, for this reason, the bids are fixed based on efficiency assumptions. (There are different

sorts of franchising depending on the specific deal:

- bidding by the unit price, such that the franchiser is induced to lower the overall prices in order to pay a lower

amount of bids, by obtaining a higher level of output;

- bidding by the lump sum payment; this is applied when the industry is a monopoly and can count on

economies of scale, such that also in this case there’s an incentive in reducing the prices;

- bidding by the marginal revenue, when the franchiser has to build the entire infrastructure, such that the

marginal revenue is future and expected based on the qualities of the supply and the features of the structure;

- the operative franchising that is such when the franchiser only has to consider the operative costs while the

franchisee maintains the responsibility of paying the maintenance costs.

- the public auction, which may be English or Dutch: in the first case, the prices are increased bid by bid, such

that the level of available information is higher, by achieving a higher expected value; in the second case, the

prices are lowered in each bid, starting from the highest bid; as a consequence, the Dutch auction provides a

lower expected value.

- the integration and the separation, which are two franchising tools that achieve the same result, meaning the

competitive equilibrium outcome, even if the firms act in a monopolistic framework. In the integration case, a

firm is integrated by another or other ones by summing up different functions and increasing their efficiency.

The separation can be vertical or horizontal: in the first case, the overall industry is divided by functions while,

in the second case, there are different firms, equal for the organizations and different for the geographic areas.

The vertical separation is convenient when the bigger firm benefits from the economies of scale, while the

smaller one works at a local level by minimizing costs.

- the big bang franchising and the progressive franchising which are both used when a firm switches from

public to private: in the first case, the franchising implies a direct transit, while in the second case it is

progressive.)

The regulation by contract is a harnessing-market controls, that implies an agreement between a public

agency and a private undertaking, which voluntarily signs by accepting the standard settings imposed by the

former. This strategy is very useful in order to create a harmonization among firms, by equalizing them in the

behavioural features, such that it will be useful to control them from the public administration point of view.

Moreover, this strategy may be used also in the opposite sense, meaning that the features of the contracts may

be specific to the firm-party.

The last sub-strategy is the tradable permit one, according to which the tradable permits are spread by the

public administration in order to control both the entries of the firms in a specific sector and their subsequent

behaviour. Moreover, they will be able to operate in it by following the conditions of the permits, like the

duration. So, the incentives for the firms to behaviour in a correct way are established by the market in the

tradable permits. Nevertheless, some issues may arise: first of all, the enforcement is still carried out in order

to control the firms actions; the permits do not consider the potential harms created to consumers; the tradable

permits may create barriers to entry in the specific sector; the market may be inefficient even if tradable permits

are purchased; moreover, if in the market there are informational problems, also the information acquired by

the public agency is below optimal levels compromising the public control.

The “direct action” regulatory strategy

12.

It is used when the state directly acts intervening with investing in firms, such that lasting projects are put into

action. In particular, this happens with small firms, having a lower capacity in investing in order to facilitate

correct behaviours in the market. Nevertheless, big problems may arise with direct interventions of the state:

- the public funds may be used as revenues by the firms while they should in general count on their productivity

capacity, such that they may become very vulnerable to dynamics of the markets, to market failures, especially

when the public resources cannot be provided to the private company.

- innovation may be driven by the state action.

- there may be problems of inequalities between firms because of the intervention of the state, given that the

smaller firms will benefit from it.

For these reasons, it is better to design solutions by pushing the company to individually adopt it, without using

external funds.

The regulatory strategy of “rights and liabilities”

13.

In this case, the State allocates rights and mirroring liabilities, in order to control and plan the activity on the

market such that it will be efficient. The deterrent effect must be correctly defined in order to be efficient. In

fact, most of the problems may arise because of the incorrect definition of the negative externality economic

value. In particular, the efficient level of deterrence is the one which ensures that the industry owner will spend

money in avoiding pollution, up to the point where the avoidance exceeds the harm level caused by the

negative activity. So, it is important to establish the correct deterrent price on which liabilities will depend on.

However, this is difficult to be predicted and a series of side-effects may be created. The “rights and liabilities”

strategy is characterized by a number of issues. Firstly, deterrence doesn’t operate in a direct and frictionless

manner. Given that the efficient level may not be found, then sub-optimality may occur. Eventually, it is

difficult to figure out who the right defendant is causing the harm.

(1) What does self-regulation mean? (2) The advantages of self-regulation. (3) The worries

14. related to self-regulation.

Self-regulation is a complex of rules, standards, proceedings, and sanction formulations, defined by a private

organization and affecting on its members, who democratically or voluntarily signed it. We can make three

groups of distinction concerning the self-regulation. First of all, one distinction refers to the public agency

role: it may be determinant for the definition of the self-regulation, or it may have a marginal role. Moreover,

the second distinction concerns the interest on which the regulation is based, given that it may only refer to

private interests linked to the association, or it may also include public interests. The third distinction is about

the legal force of the regulation, because it can involve rules of legal force, or it only acts in a voluntarily

manner. Self-regulation is useful because the level of enforcement required by the public agency is at minimum

and, so, the costs related to it. Besides, this regulation is flexible given that it is realized by the managers of

the association, such that the regulation will be modified, when necessary, in a fast way. Nevertheless, there

may be concerns about the self-regulation, which are linked to mandate, fairness of procedures and

accountability. However, these may be cancelled out when two advantages hold: expertise and efficiency.

Talking about the advantages, the expertise is often a feature of the managers creating the self-regulation,

because they have a well high technical knowledge about the organization and the members taking part in it.

Moreover, they have easy access on all type of information concerning it. This will ensure a high level of

expertise by the self-regulators. The second advantage is the efficiency, which is also linked with informational

features. In fact, information is the instrument used to modify the regulation when it is necessary and the easy

and fast access of information provides low costs for the regulators, such that the maximum outcome is likely

to be realised. Efficiency is also determined by the flexibility of the regulation.

Regarding the drawbacks, first of all the mandate is considered. It is not easy to decide the right group of

persons that will be enrolled with the self-regulation drafting. In fact, anti-competitive or anti-social rules may

be established, by affecting people external to the organization in a negative way. In fact, self-regulatory bodies

may be featured by no democratic legitimacy, in which it is hard to justify the rules and actions. That’s why, it

is often asked a public agency to take the responsibility of non-harmful regulations. The second disadvantage

is liked to the previous one: it is the fairness of procedures, given that the external subjects do not have access

or have a limited access on the full regulation, even if it may generate effects on their outcomes. Nevertheless,

when expertise and efficiency hold, these drawbacks may be cancelled out. In particular, this happens when

the regulation is written in a formal statute, which is well-published on the official organization website.

Moreover, the statute should include all the possible events that may occur and that are linked to the

organization itself, by considering non-harmful rules, correct sanctions, the decision-making, the full

representation of consumers. In the end, accountability may be absent in a self-regulation regime. However,

also in this case, the efficiency and the expertise tend to ensure a right accountability in the organization. There

is a number of cases in which accountability can be introduced: rules may be drafted and then added to the

regulation if the majority of the members votes positively to them; the guarantee of a public contro