Market Structure and Performance

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Market structure refers to the number of firms in a sector and the nature of their interactions. Governments regulate market structure in various ways, including removing barriers to entry, restrictions on market concentration, and restrictions on vertical integration. Governments may also regulate market conduct, which includes controlling operators’ pricing and production practices or providing incentives for appropriate conduct.

Regulation of market conduct is traditionally viewed as a poor substitute for competition. As a result, regulators often encourage competition whenever practicable. The advantages of competition over regulated conduct include limited opportunities for political rent seeking, fewer information asymmetries, and better incentives to serve customer interests. When an operator is subject to at least some competitive pressures, regulators generally allow the operator pricing flexibility, ranging from deregulation to the opportunity to lower prices to long run marginal cost.

Sometimes infrastructure regulators share responsibility for ensuring competitiveness of markets with a competition regulator that is concerned with all sectors, but there are also instances where the regulator plays the role of the competition regulator.2 The competition regulator generally has three functions. The first function is to remedy anticompetitive conduct, such as collusion.3 This function is generally ex post, meaning that the competition authority responds to activities that have already occurred. In contrast, utility regulators generally address competitive issues ex ante, meaning that they act to prevent anticompetitive conduct. The second function of the competition authority is to ensure that industry mergers do not significantly decrease competition. The third function is consumer protection, such as enforcing warrantees and advertising claims. When sector regulators and competition authorities are separate bodies, they often cooperate in their efforts.4

Footnotes

  1. Regulation of Market Structure vs. Regulation of Conduct notes the regulation of market structure versus the regulation of market conduct. Market Structure and Competition examines various market structures and related regulatory issues.
  2. See Competition in Infrastructure Markets, Institutional Design Issues, and Stakeholder Relations for information on relationships with other agencies, such as competition authorities.
  3.  Competition in Infrastructure Markets examines anticompetitive conduct.
  4. Stakeholder Relations notes approaches for regulators to relate with customers.