How BAA Can Be Affected by Competition Commission Decision to Sell Two Airports Essay

Identification of Purpose

This report seeks to assess the impact of regulation on BBA as a company following the competition commissions directive that provides that the firm should sell two of its airports.

Through the analysis of economic literature, the paper explores the costs and benefits associated with regulation. In particular, the paper evaluates the likely disproportionate effects that regulation may have on BBA as a company.

The burden of business regulation is a major concern for businesses. According to Grant Thorton/ ICAEW (2012, p.2), business professionals often rank regulatory intervention or requirements as the main factor posing serious challenges to organizational performance.

In the latest survey in the United Kingdom, 41 percent of businesses in the United Kingdom highlighted regulation as a serious challenge to their operations compared to a year earlier.

Regulatory issues were ranked first among all the challenges identified. This evidence highlights the need for further research in the area of regulation because it is an important economic issue that companies are worried about.

Critical Discussion of Current Literature

Regulation in general is very broad in meaning. Regulation can basically be defined as a specific set group of commands such as those enacted through the legislature. It may also refer to a deliberate attempt by the state to influence social and business behavior through incentive instruments (Baldwin, Cave & Lodge 2012, p. 3).

Regardless of the definition adopted, regulation is viewed as limiting behavior or freedom. According to Baldwin, Cave and Lodge (2012, p. 3), through its restrictive mechanism, regulation intends to prevent negative outcomes to the society as the regulated activity is considered valuable by the society.

In the modern context, regulation is better understood as a an umbrella where various stakeholders collaborate to achieve desirable outcomes such as best sharing practice, transparency, public participation and data provision (Solomon 2008, p. 819).

Need for Regulation

According to Dobos (2007 p. 330), regulatory interventions are situation dependent. They depend on the political and economic institutions in place that call for intervention measures.

The effects of regulation most certainly interfere with business activities, and this interference has the potential to benefit some segments of the population and harm others including the whole industry, individual players, and the market.

Because of this, it is important to assess why governments (Competition Commission) regulate and identify who they wish to profit from the regulation.

As Baldwin, Cave and Lodge (2012, p.15) note, one of the major reasons for regulation are instances when the market fails. When the market fails, regulatory intervention is justified because under market failure, the market cannot produce optimal output that matches the interest of the public.

From economic theory, markets aim at achieving Pareto efficiency; that is, markets should allocate resources in such a manner that it makes one player better off without making the other player worse off.

Nevertheless, situations arise that distort market efficiency rendering efficiency in resource allocation unattainable. When the market forces of demand and supply fail, welfare results cannot be attained and undesirable outcomes can never be stopped.

Monopolies are an example of market failure and it is a similar situation that the Competition Commission had to deal with in relation to BBA (BBC News 2011, p.1).

Under monopoly, a single producer dominates the market for services or goods in a manner that the firm maintains its position as the single seller in the market with no substitute service or product and with significant entry barriers into the market (Baldwin, Cave & Lodge 2012, p.16).

A monopoly situation is detrimental not only to the consumers but also other firms seeking to enter the market.

A monopolist aims at increasing its profits by cutting on its output to reduce its production costs while at the same time increasing the price it charges on its goods and services because the demand for its goods and services increase continuously given that supply is reduced (Baldwin, Cave & Lodge 2012, p. 16).

In the end, profits are redistributed from the consumers to the producer, which is a less optimal and socially undesirable outcome.

Dobos (2007 p. 329) argues that competition law, a form of regulatory intervention permits the return of competition into the market and splits a part the monopoly leading to more efficiency in wealth distribution.

From the BBA case, BBA ownership of the airports in the United Kingdom cannot be regarded as monopolistic in nature. However, it was the most dominant player to the extent that it could pursue some monopolistic tendencies.

According to the BBC News (2011a, p. 2), BBA operated six airports in the United Kingdom including Heathrow UKs largest airport in terms of number of passengers, Gatwick, Southampton, Glasgow and Edinburgh.

Such an ownership structure was considered by the Competition Commission to be anti-competitive.

Critical Discussion of Current Literature Pertinent to BBA Case

This section reviews some of the literature that attempts to explain the effects that regulation has on a companys performance. At the company level, the paper evaluates how regulatory intervention may affect businesses like BBA.

In the analysis, the report takes into account the role that efficient markets play in ensuring optimal market outcomes.

In addition, an evaluation is done on various literatures that have tried to ascertain the existing correlation between major macroeconomic variables and the incidence of regulatory burden.

How the Competition Commission’s Directive Affected BBAs Entrepreneurship

To ascertain the effect of regulatory intervention on BBAS entrepreneurship requires the formulation of an entrepreneurship measure (Da Silva Martins & Paula 2007, p. 22). A number of studies have paid significant attention on the volume of new entrants joining the market post-regulation and how this can be affected by the regulation of entry.

The number of new entrants may not be a perfect proxy for entrepreneurship. Nevertheless, it enjoys the advantage of being relatively easy to measure.

According to a study conducted by Solomon (2008, p. 829) using a data set from the World Bank, if the cost of regulation is increased, it limits the creation of new companies in many parts of the globe, more so in industries that enjoy high entry rates of new firms.

In the same study, the authors found out that industries that are characterized by high entry regulations are often linked with large sized businesses, which is a clear indicator that regulatory interventions often limit the set up of small companies.

This negatively affects not only the strength of competition within the markets but also the Pareto-efficient objective of attaining efficient market outcomes. Ardagna and Lusardi (2008, p. 14) carried out a similar research by Klapper, Laeven and Rajan (2006, p. 591) study.

For them, they focused on the waiting time (delay) linked with regulatory intervention as opposed to costs. The researchers modeled how bureaucratic tendencies affect business development and employment across different industries.

In their findings, the authors argue that in countries where more time is required to register a new firm, there is slow entry of new firms post regulatory intervention.

If the UK airport market portrays the same characteristics, then it implies that BBA will still benefit from the operations of its other airports due to slow entry of firms into the industry (Ciccone & Papaioannou 2007, p. 444).

In another research, Nystrom (2007, p. 3) evaluated entrepreneurship determinants in various countries. In his findings, the author argues that institutional setting is an important determinant of a countrys level of entrepreneurship.

In addition, he argues that regulatory intervention of labor, business and credit is a major determinant of a countrys level of entrepreneurship post regulation.

Empirical Literature on the Impacts of Regulatory Intervention

Ardagna and Lusardi (2008, p. 23) in their study explained the global differences in entrepreneurship. The researchers had a data set comprising of 37 developed and developing countries with detailed data on individual characteristics.

The researchers then combined the information collected from the individual characteristics with information on regulatory intervention. Their findings were in line with studies don earlier.

The results indicated that regulation plays an important role in an individuals choice to open a new business. Regulation was found to be a significant entry barrier and as a result a deterrent to entrepreneurship especially those looking for a business opportunity.

Similarly, findings from industry specific level research carried out by European Commission (2008, p. 395) in the food retail sector indicate that stringent market entry requirements makes the markets more concentrated.

This leads to a significant reduction in competitive pressures. This in turn gives rise to adverse consequences in the economy not only in terms of high unemployment rates in the specific sector, but also in form of higher prices being charged to the consumers.

This report highlights important and concrete evidence of how the burden of regulatory intervention gives rise to reduced competitive pressures, inefficiency in resource allocation and underutilization of the available resources.

The Effects of Regulation on a Country’s Economic Growth and Productivity

Several studies have been undertaken in an attempt to evaluate the impact of regulation on the economy as a whole. Evident differences exist not only in growth rates but also productivity performance in various developed economies.

In a study by European Commission (2008,p. 394), the authors attempt to device an explanation based upon regions in which countries vary most, the existing institutions and how the regulation of both the labor and product markets influence entrepreneurship choices.

The authors further analyzed how regulation can potentially affect a firms ability to join markets and compete with existing players. From economic theory, it is clear that through healthy competition, firms achieve efficiency and efficiency translates into increased productivity.

The authors argue that total factor productivity growth is inversely correlated with statewide regulation measures undertaken. They conclude that increasing regulation only has the effect of slowing productivity growth.

Similarly, in their findings, the authors note that administrative burden act as a consistent barrier entry of new players in the market.

Resulting into a waste of valuable time, increasing costs, and significantly reducing the incentive to innovative and market competitive pressures.

Risk Based Regulation as a better Alternative

As an integral component of the deregulation agenda, regulation based on risk has taken a center stage among regulation theories from the early 1990s (Lee & Stallworthy 2012, p. 9).

The objective of risk based regulation is risk management using risk tools given that risk based regulation is both scientific and economic in nature. The idea is that in managing risks, the risks should be accorded first priority and not the rules to gather the correct data and then realign the firms operations based on risk governance.

A regulation based on risks intends to create not only certainty but also better regulation premised on regulatory impact assessment.

Through the assessment, a cost benefit analysis is done to the new legislation to ascertain if its impact is balanced and if it can achieve then target for which it was set.

Nevertheless, from the 2000 new Lisbon agenda member countries of the European Union have advocated for regulatory policies that favor growth and employment creation at the expense of the environmental impacts.

Regulations should not be measured based on economic variables alone, instead they must equally incorporate measures of greater integration, more coherence, participative and strategic regulation.

Regulation of risks is quite broad. The European Union has surpassed its initial target of making legislation simpler and cutting down on the incidence of administrative burden to business.

The member countries have formulated smart legislation, which scrutinizes legislation implementation with the objective of identifying any overlaps, outdated areas and inconsistent aspects of any new regulatory legislation.

Within the United Kingdom, the environment policy has paid greater attention to the relative risks inherent within activities to improve general efficiency and reduce on the administrative burden suffered by regulated businesses.

Sustainable consumption theory contends that all other regulation theories focus on responses to industrial risks in one guise or another and that the focus should move away from the pollution to environmental consumption.

Regulation and environmental regulation in particular, should focus more on the loss of natural capital, which is inherently unsustainable and the temporal effects of environmental harm, which affects current and future generations.

The explosive combination of consumption, population growth and production are said to be causing current environmental global problems.

Conclusion

From the analysis and review of literature, the report shows that regulatory intervention can have adverse effects on economic efficiency.

These negative effects are partly a result of the effects of regulation on entrepreneurship, however a large percentage of the effects arise from the impacts of regulation on competition.

Some regulatory tendencies tend to act as bureaucratic red tape to free business operation not only in theory but also in practice.

Because of this, the number of new companies joining the market post-regulation is significantly reduced thereby reducing even further the competitive pressures.

Even though regulation is aimed at rectifying market failures and promoting the interests of the public, it is worth noting that at times a trade off occurs between the goals that regulation seeks to achieve and economic efficiency.

Excessive regulation can significantly limit competition and prevent enterprise. For this reason, regulation policies must be scrutinized in detail and thoroughly considered.

Theoretically, competition eases when economic efficiency is negatively affected. When competition is reduced, price cost margins become higher because existing companies in the market possess more market power.

This leads to reduced efficiency in allocation. Such a situation can also lead to a reduction in production efficiency.

Similarly, if competitive pressures are reduced, the long-run dynamic efficiency of firms in the industry will be affected as they will have limited incentive to remain innovative.

From the review of various economic research studies that looked into the practical effects of regulatory intervention, it is clear that regulation affects entrepreneurship across countries.

From the findings, there is increased burden associated with regulatory intervention. The burden is felt in terms of limited consumer choices, high prices, and reduced economic activities.

Findings from international research equally indicate that negatively affects the distribution of a companys size in the market. Increased regulation gives an upper hand to the big firms in the market leading to reduced competitive pressures.

From a macro-economic perspective, the effects of greater regulation have the potential to limit competition in the whole economy. This leads to reduced productivity, increases unemployment, and limits economic growth and development.

This report equally evaluated the role of entrepreneurship in the economy. The dynamic nature of entrepreneurship is a major driver of innovation, competition, and improvement in efficiency levels across all sectors of the economy.

In addition, the important role played by entrepreneurs is evidenced by the fact that they their greater participation has given rise to increased economic growth in developed economies. This is more evident in knowledge based economies like the United Kingdom.

Evidence from the United Kingdom indicates that the UK performs better relative to other developed countries in terms of regulation and ease of doing business. However, the country has begun experiencing significant challenges.

Given the competitive nature of the global business environment, the United Kingdom is losing ground according to several latest rankings.

Worse still, the United Kingdom National Audit Office has often has often expressed dissatisfaction on the degree to which the countys regulatory impact assessment effectively addresses the economic effects of regulatory intervention.

There is need for a thorough consideration on the effects of specific regulatory policies on public interests. The findings from this report clearly highlight that both theory and practice indicate the potential adverse effects that regulation continues to develop in the economy.

Governments should ensure that they create attractive business environment in which companies of all sizes can thrive. To do this, governments must work towards addressing the incidence of regulatory burden especially on small and medium enterprises.

An organization could be valued based on the price of its assets on the market at the given period. It is vital for investors and other stakeholders in an organization to know the value of the firm as it helps in establishing their willingness to invest in the firm and establishing ling term ties with the organization.

In a fair market, the price of the assets of an organization are usually not predetermined, but determined through the bargain between the buyers that are able to purchase them and the sellers that are able and willing to sell them.

For fairness to exist, there should be not party at an advanatage as both parties are expected to be knowledgeable about the market with information symmetry being fulfilled.

Similarly, the management of a given firm should be aware of the value of the organization in the market in order to avoid any overpricing the company’s assets or under-pricing them as this could result in negative outcomes (Craig 2000, p. 357).

In some cases where an organization does not know the value of the assets of the firm, a professional appraiser is employed.

The person has the duty of establishing advising the management of the firm on the current value of the firm and its assets in the market.

In order to determine the company’s value in the market, he or she could compare the firm to other similar organizations in the market to establish the reasonable price that the assets of the company could go for in the market.

Despite the establishment of the value of the assets of the firm in the market, the price of the assets could be affected by various factors thereby enabling their change.

Some of the factors include improved brand of the company and a positive reputation of the firm resulting from improved quality, corporate responsibility or customer care.

The benefits of a good reputation of an organization is that it increases the goodwill of the firm while the quality of the company’s brand could be improved through innovativeness and increased skilled employees in the firm.

The overall effect is the increase in demand of the product or services of the firm hence the financial performance of the company.

The improvement of the performance of the organization could be easily captured and reflected in the balance sheet of the company among other financial reports.

Therefore, the stakeholders of BBA can find vital information on the balance sheet of the company concerning the company’s net worth and debt among other information relevant to their interests such as the level of inventory.

List of References

Ardagna, S & Lusardi, A 2008, Explaining international differences in entrepreneurship: the role of individual characteristics and regulatory constraints, National Bureau of Economic Research, Cambridge.

Baldwin, R, Cave, M & Lodge, M 2012, Understanding regulation, Oxford University Press, New York.

BBC News 2011, BAA to sell Edinburgh Airport over competition rules, <https://www.bbc.com/news/uk-scotland-edinburgh-east-fife-15367555>

BBC News 2011a, BAA told by Competition Commission to sell two airports, <https://www.bbc.com/news/business-12903669>

Ciccone, A & Papaioannou, E 2007, Red tape and delayed entry, Journal of the European Economic Association, vol. 5, no. 3, pp. 444-458.

Da Silva Martins, L &Paula, S 2007, Indicators for measuring entrepreneurship: A proposal for a scoreboard, Industry and Higher Education, vol. 21, no.1, pp.85-97.

Dobos, I 2007, Tradable permits and production-inventory strategies of the firm.

European Commission 2008, Think small first-a small business act for Europe, Brussels Com, vol.4, pp. 394.

ICAEW/Grant Thorton 2012, Q2 2012 business confidence monitor results, ICAEW / Grant Thornton Business Confidence Monitor, vol.4, pp.2-4.

Lee, R & Stallworthy, M 2012, From the criminal to the consensual: The shifting mechanisms of environmental regulation in Coggon, Cambridge University Press, London.

Solomon, M 2008, Law and governance in the 21st century regulatory state, Texas Law Review, vol. 86, pp.819-834.