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Evaluating Market Structures: Retail Competition Insights

Learn about retail competition models, market share measurements, and characteristics of network industries and electric markets. Explore standard measures of competitiveness and the impact of passive vs. active demand in different market structures.

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Evaluating Market Structures: Retail Competition Insights

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  1. Assessing Retail Competition David Loomis Illinois State University 309-438-7979 dloomis@ilstu.edu

  2. Overview • Market Characteristics • Standard Measures of Market Competitiveness • A Model of Customer Switching • Alternative Market Share Measures - AMS and NMMS • Lessons from Telecommunications

  3. Characteristics of a Perfectly Competitive Market • Many buyers and sellers who are price takers • No barriers to entry or exit • Mobility of factors of production • Perfect information • Profit-maximizing firms

  4. Characteristics of Network Industries • Customer is ‘attached’ to a fixed network • Network maintained by regulated entity (may also be default provider) • Customer must be linked with a provider during ‘new connect’ • Purchases automatically recur unless the customer switches

  5. Characteristics that Impact Market Share Measurement • Passive Demand • Presence of a Default Provider • Imperfect Information

  6. Unique Characteristics of Electric Markets • Inelastic Demand • Peak Characteristics • Transmission Constraints • Properties of Electricity

  7. Standard Measures of Market Competitiveness • Structure • Size and number of competitors • Conduct • Pricing and marketing strategies and behavior • Performance • Profitability

  8. Structure Measures • Regular Market Share (unit/revenue) • Alcoa (1945) - Judge Learned Hand stated that 90% of a market "is enough to constitute a monopoly; it is doubtful whether 60 or 64 % would be enough; and certainly 33 percent is not." • Herfindahl Index - Merger Guidelines • If H is over 1800, "highly concentrated." If 1000-1800, "moderately concentrated." Under 1000,"unconcentrated."

  9. Passive vs. Active Demand • Network Industries - provider decision once, continues until switch • Other Markets, active choice of brand for each purchase

  10. Implications for Market Share • Traditional analysis implicitly assumes active demand • Total Market Share overemphasizes past decisions • Extremely affected by how decision is introduced

  11. Model • Two stage - searching and switching • H - shopping cost • W - incumbent brand equity • E - effort expended to switch

  12. First Stage - Shopping • Customer will shop if [PI-E(PC)]qi > H + W + E • So customers shop with higher usage than • qi > (H+W+E)/(PI-PI) = qx

  13. Second Stage - Switch • Customer will switch if [PI-PC]qi > W + E • So customers switch with higher usage than • qi > (W+E)/(PI-PC) = qs • Usage M.S. is less than # of customer M.S.

  14. Active MS and New Move MS • AMS describes real-time decisions, but is difficult to measure. • NMMS approximates AMS when customers can choose during new-connect Entire Customer Base Movers Shoppers switchers switchers

  15. New Move Market Share • Easy to measure: supplier choices of new connects are easily observable • Reflects decisions during an ‘active choice’ time • ‘Real Time’ measure showing current activity • Highlights the importance of operational details (sign-up procedures)

  16. Lessons From Telecommunications • “Success” Case – Long Distance • “Failure” Case - Local

  17. Lessons from Long Distance • Market share for the incumbent may fall slowly and take a long time to decline to competitive level • Access charges were discounted to competitors • Competitive state may mean only a few large providers • Short run excess profits may earned by incumbent – attracts entry

  18. Local Market Share Graph

  19. Lessons from Local Telecommunications • Barriers to entry is the single most important factor in determining competition • “All competition is local” • Mere presence of competitors is insufficient

  20. Conclusions • Traditional Market Share measures do not accurately reflect current decisions • Active Market Share is a better approach, but is hard to measure • New Mover Market Share approximates AMS and is easy to measure • Barriers to entry must be monitored

  21. References • Loomis, David G. and Eric Malm, “Active Market Share: Measuring Competitiveness in Retail Energy Markets,” Utilities Policy, Vol. 8 No. 4, 1999. • Loomis, David G. and Eric Malm, “The Devil in the Details: An Analysis of Default Service and Switching,” 20th Annual Advanced Workshop on Regulation and Competition, May 24, 2001.

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