Regulation and the nature of competition

Regulators are often required to assess the extent of competition in a market, and to promote competition or to substitute for it. Interpreting competition as a perfectly competitive equilibrium has led regulators to over-regulate. Interpreting competition as a rivalrous discovery process calls for lighter handed regulation. Around the world, regulators including some airport regulators have been encouraging approaches such as negotiated settlement between regulated companies and their customers. The CAA's use of constructive engagement by London airports is another example. However, in many cases, regulators with a duty to promote competition have discouraged it by undue price controls. The CAA's recent price control review is a case in point, although the CAA mitigated the situation by deregulating Stansted and allowing an airport-proposed price undertaking at Gatwick. This raises the question of when regulators are needed. In order to regulate an airport, the Civil Aviation Act 2012 requires the CAA to show that the airport has market power, and that competition law would be insufficient to address this power, and that the benefits of sector regulation outweigh the adverse effects. This proved effective and could be considered for other regulated sectors.