13 - Abuse of Market Power in (De)Regulated Industries

Summary

Regulation is not adjusting fast enough to changes in market structure due to unanticipated changes in technology and preferences. Regulators need to conduct diagnostics to assess the impact of abuse of market power, both ex ante (e.g. in the context of mergers) and ex post (e.g. in gauging profit margins). Both the empirical and the more conceptual assessments of the tools available to conduct these diagnostics are misleading if the market details are underestimated and/or the necessary accounting data are only partially available. The regulation of a vertically integrated monopoly participating in a competitive market in some of its production activities can lead to multiple benefits and risks. Benefits include the efficiency payoffs of the competition effect, the optimization of production cost synergies, and the incentive to innovate to remain competitive. Risks include a higher uncertainty on quality, social and political outcomes, and on the enforcement of access rules and prices. Whether the access prices should be based on the global price cap or the efficient component pricing rule approach is still up for debate. For two-sided markets, the regulator needs to account for the difference in valuation of the same service on the two sides of the market, interactions between the two sides, and the possible desirability of cross-subsidies to finance the common facility.