ABSTRACT
Third, it is recognised that in imperfectly competitive markets, firms not infrequently have used as an entry deterring strategy the building-in of excess capacity (for example, Dixit 1980). Although the utilities sector can be characterised by areas of considerable market power, nevertheless, there is often a competitive fringe that can threaten from time to time the core activities of the monopolist. But (and it is a point generally ignored in the economic regulation
literature), the regulated utility is well-placed also to pre-empt such entry by leveraging its market power to expand capacity through an overly generous CAPEX programme, especially when proposed CAPEX is an area treated circumspectly by the regulator. The use by the utilities of such entry deterring strategies has been noted, for example, in the European gas industry (Cornwall 2004).
