Regulation of oligopolies.

Continued from "Managed Moorings"

John Commented "First your figures assume that BW/C&RT have priced the mooring on the basis of 100% occupancy and therefore if they fail to achieve that they are operating at a loss. I don't know of any business (Restaurants, Hotels, Marinas etc) that would base their charges on being full 100% of the time. I assume C&RT operate the same way."

I take your point. This is something that I have been thinking about for a while now. In particular to the auction of moorings by CaRT. The more I look at it, the more I become ill at ease about how the BW/CaRT auction process works. As a monopoly business that has always been strapped for cash. I feel sure that Joe Public will feel that temptation might mean that the bidding process and the mechanism for setting the values might well be a bit eccentric.

Lets suppose that as given in the previous example, there is only a 75% moorings occupation in the wharf area where demand is high. CaRT can maintain a 25% unoccupied moorings because of the top loading on charges. Then this top loading has nothing to do with establishing a fair rental price with some profitability. It has much more to do with extracting the maximum amount of money possible and inflating the costs to maintain a price.

You can only work like this where you are a monopoly/oligopoly. So what is the figure for Engineers Wharf - we know its more than 25% as mooring prices have not been reduced. Is it a 50% operating mark-up and if so is the mark-up fair and anti-competitive?

Now, you might think that looking at Engineers Wharf in isolation is not taking in the whole picture. But when the variable costs - the minimum price - from mooring to mooring are quoted in the individual auction. It is obviously the way that CaRT calculate their profitability margin location by location.

Here are the details from three recent auctioned moorings at Tinsley. The marina has a number of empty berths. There are I think at least three empty berths.

Auction: 3687 - Tinsley Marina (no bids made)
Guide price: £1,966
Reserve price: £1,475
Closing date: 23/03/2012

Auction: 4129 - Tinsley Marina  (no bids made)
Guide price: £1,986 (+£20)
Reserve price: £1,589 (+£114)
Closing date: 29/08/2012

Auction: 4325 - Tinsley Marina  (no bids made)
Guide price: £1,986
Reserve price: £1,788 (+£199)
Closing date: 22/10/2012

In March the price difference between guide and reserve price was £491 pounds, or the reserve was 25% lower than the guide price. Yet recent auctions have not had a single bid, the price hike continues. In august the "meaningless guide price" has gone up by £20. However, the "reserve price" has gone up by a further £114 pounds. In September the reserve price is raised by a further £199 pounds. This is the world of crazy CaRT economics. No one wants the moorings even at the reserve price in March. No bids are made, so the minimum reserve price goes up by a further £333 over the following nine months. So while the top price moves slowly the minimum price moves on at a fair lick! The price difference between the guide and reserve price is now only £198 pounds. Which now coincides with being exactly 10% of the guide price!

There are regulations in place to control the excesses of any business in the UK that is seen to be operating as a monopoly. The regulations are quite broad and from what I have read have significant implications for anyone manipulating a market. (The legislation came into force in 2000 and the Regulators have the power to enforce prohibitions and to impose fines of up to 10% of turnover) The rules are set by government and are set to control the operation of businesses who may have monopoly power within their own industry. The regulations are intended to deal with the problem of a market failure. Where the markets fail to reach an optimal allocation of the resources. Now would a 25% under occupancy of residential moorings be acceptable?

The regulation also are intended to control the power of any monopoly, which may lead to consumers being exploited. An example might be where prices charged are significantly above the true cost of supply. In terms of the regulation of a monopoly situation. The government attempts to prevent such operations that are against the public interest. The so called anti-competitive practices. Problems can and occur from time to time when the market structure within a given industry becomes monopolistic. Especially where a take-over or change of the business causes a business to supply more than 25% of the market output. There can also be problems with the wonderful sounding "Oligopolies" particularly if there is evidence of collusive behaviour by the dominant businesses within an industry. Say between private marina's setting prices that do not reflect true market values.

Now, if you or I or anyone else do not have access to the mechanism for understanding how the charges are made. Then how can anyone establish whether the prices are being manipulated and in breach of the regulations. There is no mechanism of encouraging competition, no transparency and no knowing if the practices are anti-competitive and or acting against the interests of the customer. We can only speculate rather than comment from a position of understanding on what is happening!

There is also European Competition Law to take into consideration. Articles 81 and 82 of the Treaty of Rome prohibits certain market practices deemed to be anti-competitive and which act against the interests of consumers. Article 81 prohibits acts which damage competitiveness in a market. Article 82 prohibits the abuse of a dominant position.

Under the European Competition Law, prohibitions fall into a number of categories.

• Anti-competitive agreements.
• Abuse of dominant market position.
• Fixing purchasing and selling prices.
• Applying different trading conditions to equivalent transactions.
• Imposing unfair purchasing or selling prices.
• Consumers unable to get hold of easy to understand price comparisons.
• That competition has fostered the development and introduction of new services.

John Commented "Second you state that 'as a monopoly CaRT cannot have a business confidential reason for not revealing the method for calculating the figures'. Assuming that part of their costs are the price they paid for the land and the rate they borrow money at then to reveal details of their pricing strategy might disclose (or at least be able to give an educated guess at) these figures. Which would be very interesting to people they are negotiating with or are in competition with to buy land."

I did not have the purchase of land in mind when I made my comment. I was concentrating of the charges for moorings. However, as far as I am aware from the popular press (on-line magazines, forums and even private eye) BW/CaRT do not have a very good history of speculating within the land sales, business ventures and the spiralling property market. If BW/CaRT management made a loss on their portfolio of speculations, up until recently Joe Public through government picked up the bills. Now its going to be the inland waterways users (well, those who contribute) who are going to pick up the bills. Joe public has already demonstrated clearly that they don't want to be £3 friends with CaRT. 

I have wondered for some time now if CART could be referred to The Competition Commission (a public body responsible for investigating businesses under competition law in the United Kingdom) Or even the Office of Fair Trading (established by the Fair Trading Act 1973, which enforces both consumer protection and competition law) acting as the UK's economic regulator. 

The OFT's goal is to make markets work well for consumers, ensuring vigorous competition between fair-dealing businesses and prohibiting unfair practices such as rogue trading, scams and cartels. Its role was modified and its powers changed with the Enterprise Act 2002.

The Competition Act of 1998 and the Enterprise Act 2002 gave the Competition Commission wider powers so that it now makes decisions on inquiries. The Competition Commission is also responsible for taking appropriate actions and measures following inquiries which have identified competition problems.

Not only do CaRT own the moorings, not only do CART set the minimum price, but CART also control the bidding process. This removes even the slightest notion of any form of competition and market forces from the whole process. Is this fair?

The problem with addressing the issue is that all of this is outside of my sphere of experience, but I am fast tracking the background. Maybe I am being over simplistic or seeing a problem where none exists. However, it might just be something that someone else who understands the issues better than me, might like to run with.

Later...