Smart entry in local retail markets for electricity and natural gas

Consider a market with switching costs that is initially served by a monopolistic incumbent. How can a competitor successfully enter this market? We show that an offer to undercut the incumbent by a fixed margin serves this purpose. This strategy dominates traditional entry where the entrant just offers a lower price because it restrains the ability of the incumbent to block entry by limit pricing. We also consider adding a price ceiling to insure customers against future price increases. While this has a strategic advantage in markets with elastic demand, it is too risky if substantial cost increases are possible. -- Die vorliegende Arbeit hat zwei Anliegen. Zum einem analysiert sie die konkrete Markteintrittsstrategie von E WIE EINFACH für die bislang von lokalen Monopolen beherrschten Endverbrauchermärkte für Strom und Erdgas. Zum anderen liefert sie einen allgemeinen Beitrag zur theoretischen Analyse von Markteintrittsstrategien in Märkten mit Wechselkosten. Die Besonderheit der Markteintrittsstrategie von E WIE EINFACH besteht darin, anstatt eines eigenständigen Preisangebots den Preis des lokalen Grundversorgers um eine feste Marge zu unterbieten. Ergänzt wurde diese Strategie bis vor kurzem durch die Garantie einer Preisobergrenze auf dem Niveau des bei Vertragsschluss resultierenden Preises. Wir zeigen zunächst, dass die Strategie mit einer festen Marge dem traditionellen Eintritt mit anschließendem Preiswettbewerb überlegen ist, da dem etablierten Unternehmen die Möglichkeit genommen wird, mittels der impliziten Androhung einer Preissenkung (Limit Pricing) den Markteintritt zu verhindern. Ein solches Limit Pricing ist bei Wechselkosten deswegen möglich, da hier der etablierte Wettbewerber einen Preis über den Grenzkosten festlegen kann. Eine genauere Analyse bei elastischer Nachfrage zeigt, dass das etablierte Unternehmen zwar den Markteintritt nicht durch eine Senkung des Preises verhindern kann, dass aber eine Erhöhung des Preises bei gegebener Marge den Wechselvorteil der Konsumenten verringeren und dadurch potentiell einen Wechsel unattraktiv machen könnte. Der Neueintreter kann diese Strategie jedoch zum einen durch die Festlegung einer höheren Marge unattraktiv machen oder -was die pro?tablerer Lösung ist -durch die Kombination von Marge und Preisobergrenze der Verhinderung des Markteintritts durch Preiserhöhung den Boden entziehen. Während sich mit diesen Überlegungen die ursprünglich gewählte Markteintrittsstrategie von E WIE EINFACH ökonomisch begründen lässt, muss für die Erklärung der Aufgabe der Preisobergrenze eine Analyse mit unsicheren Kosten herangezogen werden. Hierbei zeigt sich, dass die Preisobergrenze bei (deutlich) steigenden Bescha?ungskosten (und damit Gleichgewichtspreisen) problematisch sein kann: Es sind dann nicht nur geringere erwartete Gewinne als bei Festlegung einer Marge ohne Preisobergrenze möglich, sondern es kann ex post sogar zu Verlusten kommen. Vor dem Hintergrund der beobachtbaren Kostenentwicklung -insbesondere im Erdgasmarkt -ist darum gut erklärbar, wieso die Strategieanpassung erfolgt ist. In Bezug auf die zweite Fragestellung zeigt die Arbeit eine grundsätzliche Möglichkeit der Selbstbindung beim Markteintritt auf, die auch in anderen Märkten der Überwindung von Markteintrittsbarrieren dienen könnte.Entry strategies,Price competition,Electricity,Natural gas,Markteintrittsstrategien,Preiswettbewerb,Strommarkt,Erdgasmarkt

A waste of energy? A critical assessment of the investigation of the UK Energy Market by the Competition and Markets Authority

This document is the accepted manuscript version of the following article: Chrysovalantis Amountzias, Hulya Dagdeviren and Tassos Patokos, ‘A waste of energy? A critical assessment of the investigation of the UK energy market by the Competition and Markets Authority’, Competition & Change, Vol. 21 (1): 45-60, February 2017. The final version of this paper is available at doi: http://journals.sagepub.com/doi/pdf/10.1177/1024529416678070. Published by SAGE Publishing.In this paper, we assess the findings of the UK energy market investigation by the Competition and Markets Authority, conducted during June 2014–June 2016.We argue that the results of the investigation have been advantageous for the large energy companies and they risk failing to bring any significant and positive change to the energy industry.We highlight three major aspects of the Competition and Markets Authorities assessment. First, the panel examined retail and wholesale segments of the energy industry in isolation, which can be misleading in the assessment of vertical integration. It also considered new entries to the sector as a sign of competitive strength when many were due to favourable government policies in the form of exemptions from various obligations. Second, its conclusion that a position of unilateral market power by the large energy companies arises from weak customer engagement (i.e. low switching rates) shifts the focus and responsibility for the problems of the energy markets away from the conduct of the companies onto customers. Finally, the investigation placed an overemphasis on competition without due reference to its consequences for consumers’ welfare.Peer reviewe

Product innovation when consumers have switching costs

Economists have long recognized that in free markets, incentives to innovate will be diluted unless some factors grant innovators with a temporary monopoly. Patenting is the most cited factor in the economic literature. This survey concentrates on another factor that confers innovators with first-mover advantage over their competitors, namely consumer switching costs, whereby a consumer makes an investment specific to her current seller, that must be duplicated for any new seller. In this survey, we list several components of switching costs that are relevant as regards to firm innovation behaviour. The aim of this classification is twofold. First, consumer switching cost theory has matured to the point that some classification of switching costs for both understanding innovative firm behaviour and building policy-oriented models is necessary. Second, the classification included in this paper addresses the confusion that has been existing so far regarding the distinction between ‘good’ or ‘bad’ switching costs, perceived or paid switching costs, and between switching and search costs. This paper then surveys the existing literature on the effect of switching costs on product innovation by firms and the way they compete for consumers. We also raise several important regulation and competition policy questions, using examples from the real world.Consumer switching costs; Search costs; Product innovation; Competition policy; Economic methodology

Effects of user experience on user resistance to change to the voice user interface of an in‑vehicle infotainment system: Implications for platform and standards competition

This study examines the effects of user experience on user resistance to change—particularly, on the relationship between user resistance to change and its antecedents (i.e. switching costs and perceived value) in the context of the voice user interface of an in-vehicle infotainment (IVI) system. This research offers several salient findings. First, it shows that user experience positively moderates the relationship between uncertainty costs (one type of switching cost) and user resistance. It also negatively moderates the association between perceived value and user resistance. Second, the research test results demonstrate that users with a high degree of prior experience with the voice user interface of other smart devices exhibit low user resistance to change to the voice user interface in an IVI system. Third, we show that three types of switching costs (transition costs, in particular) may directly influence users to resist a change to the voice user interface. Fourth, our test results empirically demonstrate that both switching costs and perceived value affect user resistance to change in the context of an IVI system, which differs from the traditional IS research setting (i.e. enterprise systems). These findings may guide not only platform leaders in designing user interfaces, user experiences, and marketing strategies, but also firms that want to defend themselves from platform envelopment while devising defensive strategies in platform and standards competition

Granular technologies to accelerate decarbonization

Of the 45 energy technologies deemed critical by the International Energy Agency for meeting global climate targets, 38 need to improve substan- tially in cost and performance while accelerating deployment over the next decades.Low-carbon technological solutions vary in scale from solar panels, e-bikes, and smart thermostats to carbon capture and storage, light rail transit, and whole-building retrofits. We make three contributions to long-standing debates on the appropriate scale of technological responses in the energy system. First, we focus on the specific needs of accelerated low-carbon transformation: rapid technology deployment, escaping lock-in, and social legitimacy. Second, we synthesize evidence on energy end-use technologies in homes, transport, and industry, as well as electricity generation and energy supply. Third, we go beyond technical and economic considerations to include innovation, investment, deployment, social, and equity criteria for assessing the relative advantage of alternative technologies as a function of their scale. We suggest numerous potential advantages of more-granular energy technologies for accelerating progress toward climate targets, as well as the conditions on which such progress depends

Theoretical and Empirical Evidence of Timing-to-Market and Lead Market Strategies for Successful Environmental Innovation

In environmental policy first mover advantages for environmental technologies are often taken for granted. It is a popular view to see the state as a political entrepreneur who introduces a certain environmental policy instrument, e.g. feedin tariffs for renewable energies, and thus becomes the world market leader or the lead market for the respective technology. Against this background, this paper wants to find out if the idea of first mover advantages can be justified by theories and empirical evidence from industrial organization and business management studies. After a review of theoretical and empirical papers we see that first mover advantages are not confirmed by empirical evidence. Thereby the successful innovator is not necessarily the first but very often one of the early movers within the competition of different innovation designs. We show that the success of a timing strategy depends on country-specific lead market potentials, on market and technology characteristics and on the regime of the country-specific regulation. On this basis we derive options for environmental innovation strategies for firms under different circumstances of markets, technologies and regulations. We will see different implications for practical innovation management and innovation policy.Lead markets, environmental innovation, first mover advantages,innovation strategies

Understanding European policy on the internal market for electricity and gas: evaluation of the Electricity and Gas Directives

This report examines the various inputs to the Electricity and Gas Directives review

Unlocking the potential of the smart metering technology: How can regulation level the playing-field for new services in smart grids?

By integrating a communications system with the existing power grid, smart grids provide end-to-end connectivity. This enables all entities and components integrated in the electricity supply system to exchange information without knowing the network's structure. New services and applications such as demand response or virtual power plants that will aid to improve and optimize the use of electricity depend on the availability of a smart grid communication network. End-to-end communication networks require that the missing communications gap between consumers' premises and the remaining energy network is bridged by deploying an Advanced Metering Infrastructure (AMI). Given the current liberalized electricity markets' structure incumbent distribution system operators (DSOs) will control the AMI and the meter data. This gives rise to concerns about anti-competitiveness. We argue that leveraging the AMI in a social welfare maximizing way requires non-discriminatory access for all entitled parties to the (1) AMI and the (2) meter data through (3) interoperable standards. We discuss possible regulatory remedies to ensure a level playing-field for innovative services in smart grids and consider implications for research and regulation. --Regulation,Smart Grid,Smart Meter,Antitrust

Market bundling strategies in the horizontal portal industry

The arrival of the Internet offers opportunities for both incremental efficiency gains and complete industry redefinition, presenting new value propositions and hence leading to the emergence of new businesses and industries. One particular case is that of the horizontal portal industry, such portals being consistently the most visited sites on the Web. Nevertheless, despite ongoing market concentration, overall profitability remains low. In this paper we contend that, although the industry has great potential for value creation, value appropriation in such information-based businesses remains problematic. The only way to achieve it is through cross-market bundling; that is, portals selling their products packaged with Internet access and proprietary content through system competition. We support our claims with theoretical argument and empirical evidence, analyzing the information distribution value chain in its entirety.Portals; information goods; Internet advertising; Internet service providers; content provider;