Natural Monopoly Regulation And Effective Competition

Industries like telecom, railway transportation and supply of power, water and gas distinctly benefit from their economy of scale, due to the immense investment cost, strong asset specificity and long investment payoff period. Therefore, they are called natural monopoly industries. According to the traditional theories, owing to their huge benefits of economy of scale, these natural monopoly industries should be under the monopoly management and regulated by government regulation institutes. Since the middle of 1970s', the developed countries, including Britain and USA, have conducted a dynamic reform of deregulation in the field of natural monopoly. And after a time as short as 10 years, a vogue of competition raged through industries of telecom, aviation, railway, power supply, etc, which used to be under the monopoly management or strict regulation by the government. Regulations on price and entry were greatly released. Competition was adopted and the system of competition was set up as well.China carried out a partial reform on the natural monopoly industries from the 1980s'. Till the 1990s', the reform started to develop step by step. Attempts were made to separate the administrative functions from enterprise management and introduce in non-government capital. It was proposed on the 3rd Plenary Session of the 16th Central Committee of the CPC to quicken the reform on the natural monopoly industries: multiple main bodies of investment should be invited; a system of competition should be established; and regulation should be reinforced on the natural monopoly industries. We have seen an evident effect of the reform in some fields of the natural monopoly industries.It can be seen from the reform on the natural monopoly that deregulation and competition introduction is the direction of the reform. However, how to introduce in competition to the natural monopoly industries? How to conduct competition? What competition intensity and market structure are the most efficient? Whether will the regulation still be needed after introducing in the competition? If needed, which means of regulation would be the most effective? How to deal with the relationship between the competition and the regulation? How to establish a market structure for the workable competition in the current natural monopoly reform? How to deal with the relationship between private participation and property rights reform? All these problems need discussing both theoretically and practically.This paper is divided in seven parts.Chapter One clears up and summarizes the development and evolution of the theories on natural monopoly and government regulation, serving as a theoretical foundation for the whole paper. A general sum-up of the characteristics of the natural monopoly industries is also made here. As to the regulation theories, the analysis is about the public interest regulation theory, the regulation capture theory and the theory on regulatory economy, as well as the micro regulation theory and contestable market theory of Karl Marx.Chapter Two analyzes the traditional regulation means in the natural monopoly, mainly the price regulation and entry regulation. Also it explains the reason for the invalidation of the regulation.Chapter Three interprets the reason for the deregulation and the introduction of the competition in the natural monopoly industries. The development of the technology and the expansion of the market demand diminish the boundary of the natural monopoly and thus make it possible to introduce in the competition; the invalidation of the regulation is the most direct reason for deregulation and competition introduction. The development and the standard of the workable competition theory are elaborated in this chapter. The point of view is that the workable competition is one that the competition returns exceeds the competition cost. Thus it is an appropriate competition and meets the requirements of the economy of scale.Chapter Four focuses on the workable competition modes in the natural monopoly. Based on the benefits of network economy and the economy of scale, a differentiation is firstly made between the business fields that can or cannot directly introduce in competition. It then analyzes the boundary determination and the selection of competition modes of the natural monopoly industries in practice. In the business fields that cannot introduce in direct competition, indirect competition modes like concessionary bidding rights competition and inter-regional comparative competition can be adopted. For those that can introduce in direct competition, the loose oligopolistic market is the best.Chapter Five studies the property rights reform and private participation in the natural monopoly industries. As to the privatization reform in the western natural monopoly enterprises, it seems it is the property rights reform that works. However, it is actually the competition that promotes the efficiency. During the process of the...