As explained in the Overview, basic problems addressed by regulation include the control of market power and an asymmetry between the government and the operator with respect to objectives and information. It is also noted that there are three basic approaches to dealing with these problems, (a) subjecting the operator to competitive pressures, (b) gathering information on the operator and the market, and (c) applying incentive regulation.1 Regulators typically use some combination of these three approaches and the proper mix depends on the country’s needs and objectives, institutional capabilities and arrangements, cost of obtaining information, and potential for competition.
This chapter examines issues of subjecting the operator to competitive pressure. Competition is useful because it reveals actual customer demand and induces the operator to provide service quality levels and price levels that customers want, subject to the operator’s financial need to cover its costs. In other words, competition can align the operator’s interests with the customers’ interests and can cause the operator to reveal his true costs and other private information.
The remainder of this chapter is organized as follows. Monopoly and market power are examined first, explaining factors that give rise to monopoly and market power, and the effects of these market structures. Market structure refers to the number of firms involved in supplying a market and the relationships among those firms. Competition in the market, which is the traditional view of competition, is covered next. Facilitating competition, structuring a utility industry for competition, assessing market competition, and issues of competition for the market are then reviewed. Competition for the market is an approach used when it is impractical or inefficient to have more than one operator serve a market. Issues examined include auctions, bidding, and contracting. Chapter IV considers competition between markets. Following this chapter’s narrative is a list of references that is organized by topic.