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Smart entry in local retail markets for electricity and natural gas

Author

Listed:
  • Bartholomae, Florian W.
  • Morasch, Karl
  • Tóth, Rita Orsolya

Abstract

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.

Suggested Citation

  • Bartholomae, Florian W. & Morasch, Karl & Tóth, Rita Orsolya, 2009. "Smart entry in local retail markets for electricity and natural gas," Working Papers in Economics 2009,3, Bundeswehr University Munich, Economic Research Group.
    • Handle: RePEc:zbw:ubwwpe:20093
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    More about this item

    Keywords

    Entry strategies; Price competition; Electricity; Natural gas; Markteintrittsstrategien; Preiswettbewerb; Strommarkt; Erdgasmarkt;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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