Facilitating competition is one regulatory instrument for overcoming market power and asymmetries in objectives and information.1 Competition in the market is generally the preferred form of competition, but competition for the market is often effective if competition in the market is infeasible or impractical because of natural monopoly. Generally if competition in the market is the policy choice, the regulator has an ongoing role of regulating access to essential facilities, ensuring that barriers to entry do not interfere with competitive dynamics, and monitoring the effectiveness of the competition. If one or more of the firms have significant market power, then regulators may use price cap regulation to control the residual market power until competition develops more fully.
Competition for the market involves having operators bid for the right to be the monopoly provider of the service. Because the future is uncertain, ongoing regulation of prices and renegotiation of the concession contract are common. Frequent rebidding of the concession may be an option for reducing the need for ongoing regulation and for renegotiation.
- The reference section for Informational Asymmetry covers information asymmetries.