### 1. Introduction to Pro-Competitive Regulation Generally

The purpose of this paper is to examine the role of pro-competitive sectoral regulation, its impact on consumer welfare optimization, and the competitiveness of a national economy. We will review in particular the telecoms and postal sectors, the latter in light of postal sector reform in Japan. We focus case studies on the telecom and postal sectors because these sectors are very important as the communications infrastructure for the modern day business world. Lowering the costs and rendering these structures more efficient will lead to cost savings for business which will be consequently better able to compete on the global stage. Thus we can see that ensuring pro-competitive regulation delivers consumer-welfare-enhancing benefits has a direct impact on the competitiveness of the Japanese economy. There are also similarities between these two sectors from which general principles can be learned.

Sector regulation presents specific issues for competition policy. The roles of antitrust and sector regulation for regulated industries are complementary but at times in tension. One is forward looking and prophylactic in nature. That is, sector regulation seeks to identify a problem before it happens and creates an administrative process to proscribe behavior ex-ante. Competition policy/antitrust looks to regulate industries ex post and reacts to marketplace conditions.

In regulated industries, a number of sectors have transitioned or are transitioning from traditional regulation to competition. It is during this transition period in which we should be particularly concerned because market power in the transition might forestall true competition beyond the transition phase. Many sectors undergoing this type of transition have a strong legacy of state interventionism in the economy, including state ownership of regulated industries. Some of these industries have been fully or partially privatized while others remain under state ownership. In a number of countries the privatizations have not been accompanied by market liberalization that would ensure that incumbents could not engage in anti-competitive practices. In markets that continue to have state owned enterprises (SOEs), entrants are faced with a situation where a government serves as both regulator and market participant. In countries with fairly new competition and sector agencies, there is particular concern that a lack of strength in the competition regulator will lead to industry capture. Competition agencies, particularly those in the transitioning economies, must focus on preventing anti-competitive behavior in this area. By competition, we mean a normative framework based on economic efficiency and consumer welfare. An act that reduces consumer welfare or economic efficiency is anti-competitive.

### 2. Transition from Regulation to Competition

The pitfalls of monopoly are well known, and consist of higher prices and lower production. However, where there are significant economies of scale, a situation might exist where high levels of market power may be necessary to deliver consumer welfare benefits. These situations historically have been referred to as “natural monopolies.” In “natural monopolies,” competition would require the installation of redundant systems. To prevent this inefficiency, governments sometimes provide for legislated monopolies in areas where natural monopolies occur, such as network industries like postal, telecom or electricity. In other instances, the government creates a monopoly in such areas by its own accord because of political ideologies such as nationalization or import substitution. However, this creates a host of problems that do not occur with private monopolies. In both cases, competition agencies play a role in ensuring (i) pro-competitive regulation and (ii) that welfare