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The Contestable Markets Theory: Efficient Advice for Economic Policy

This chapter describes how, in the 1990s, several formerly monopolistic markets in Germany were deregulated based on European directives. While physical network utilities like telecommunications, electricity, gas and railways were all considered to be natural monopolies, today competition in networks is considered to be possible. Access to the essential facilities, though, is a necessary prerequisite for competition, either because new suppliers are unable to build up their own networks or because parallel infrastructure is undesirable because of possible cost duplication. Diverse regulatory regimes have been established in the sectors analyzed in this chapter. In the telecommunication sector, a regulatory authority was established and a national telecommunication law, the TKG enacted. German power authorities (electricity and gas) used to be comfortably protected against any competition. Now electric and gas utilities have lost their regional monopolies in the course of deregulation. New competitors are now able to use the networks as long as free capacities are available, the national power industry law is not violated, and gas providers are not bound to long-term supply contracts (take-or-pay clauses). The national railroad company “Deutsche Bundesbahn” has been privatized since the railroad reform. New competitors have obtained paid access to networks and infrastructure facilities through the amendment of the national competition law GWB 19 IV, No. 4. The prerequisite is the impossibility of supply on upstream or down-stream markets without network access. Different economic theories concentrate on ascertaining regulatory requirements in natural monopolistic markets, given that the theory of perfect competition – assuming atomistic supply and demand and the absence of entry barriers – is not able to identify regulation requirements in detail. Moreover, experiences in real markets shows that regulation seldom leads to market efficiency; it often does not even prevent natural monopolist from discriminating against new competitors. Competition on the deregulated German physical network infrastructure markets, for example, is far from competitive. It has therefore been argued that current regulation should be kept up or in some cases even further intensified. Some authors counter this reasoning, claiming that at least parts of the German network-bound sectors are contestable in the sense of Baumol et al.’s “theory of contestable markets.” The authors propose that the current regulatory practice toward bottleneck regulation be reconsidered and the price regulation be reconsidered and the price regulation on final customer markets be abandoned. Critics oppose Baumol’s theory on the grounds that they find it impracticable for various reasons. Especially the assumptions on which the theory is based have been sharply criticized sharply. It has been pointed out, for instance, that the ubiquity of sunk costs prevents contestability in nearly all markets. This chapter demonstrates that the criticism of this theory does not take into account certain important aspects and it also applies the theory to the German telecommunication, energy (electricity, gas) and railway sector. In conclusion the chapter gives some basic regulatory advice for the sectors analyzed.

  • Availability:
  • Corporate Authors:

    Edward Elgar Publishers

    William Pratt House, 9 Dewey Court
    Northampton, MA  United States  01060-3815
  • Authors:
    • Growitsch, Christian
    • Wein, Thomas
  • Publication Date: 2004

Language

  • English

Media Info

  • Media Type: Print
  • Features: Figures; References; Tables;
  • Pagination: pp 21-42
  • Monograph Title: Trends in Infrastructure Regulation and Financing. International Experience and Case Studies from Germany

Subject/Index Terms

Filing Info

  • Accession Number: 01031336
  • Record Type: Publication
  • ISBN: 1843767902
  • Files: TRIS
  • Created Date: Aug 23 2006 7:59AM