assessing retail competition
DESCRIPTION
Assessing Retail Competition. David Loomis Illinois State University 309-438-7979 [email protected]. Overview. Market Characteristics Standard Measures of Market Competitiveness A Model of Customer Switching Alternative Market Share Measures - AMS and NMMS Lessons from Telecommunications. - PowerPoint PPT PresentationTRANSCRIPT
Assessing Retail Assessing Retail CompetitionCompetition
David LoomisDavid LoomisIllinois State UniversityIllinois State University
[email protected]@ilstu.edu
OverviewOverview
Market CharacteristicsMarket Characteristics Standard Measures of Market Standard Measures of Market
CompetitivenessCompetitiveness A Model of Customer SwitchingA Model of Customer Switching Alternative Market Share Measures Alternative Market Share Measures
- AMS and NMMS- AMS and NMMS Lessons from TelecommunicationsLessons from Telecommunications
Characteristics of a Perfectly Characteristics of a Perfectly Competitive MarketCompetitive Market
Many buyers and sellers who are Many buyers and sellers who are price takersprice takers
No barriers to entry or exitNo barriers to entry or exit Mobility of factors of productionMobility of factors of production Perfect informationPerfect information Profit-maximizing firmsProfit-maximizing firms
Characteristics of Network Characteristics of Network IndustriesIndustries
Customer is ‘attached’ to a fixed Customer is ‘attached’ to a fixed networknetwork
Network maintained by regulated Network maintained by regulated entity (may also be default provider)entity (may also be default provider)
Customer must be linked with a Customer must be linked with a provider during ‘new connect’ provider during ‘new connect’
Purchases automatically recur Purchases automatically recur unless the customer switchesunless the customer switches
Characteristics that Characteristics that Impact Market Share Impact Market Share
MeasurementMeasurement
Passive DemandPassive Demand Presence of a Default ProviderPresence of a Default Provider Imperfect InformationImperfect Information
Unique Characteristics of Unique Characteristics of Electric MarketsElectric Markets
Inelastic DemandInelastic Demand Peak CharacteristicsPeak Characteristics Transmission ConstraintsTransmission Constraints Properties of ElectricityProperties of Electricity
Standard Measures of Market Standard Measures of Market CompetitivenessCompetitiveness
StructureStructure– Size and number of competitorsSize and number of competitors
ConductConduct– Pricing and marketing strategies and Pricing and marketing strategies and
behaviorbehavior PerformancePerformance
– ProfitabilityProfitability
Structure MeasuresStructure Measures
Regular Market Share (unit/revenue)Regular Market Share (unit/revenue) Alcoa (1945) - Judge Learned Hand stated Alcoa (1945) - Judge Learned Hand stated
that 90% of a market "is enough to that 90% of a market "is enough to constitute a monopoly; it is doubtful constitute a monopoly; it is doubtful whether 60 or 64 % would be enough; and whether 60 or 64 % would be enough; and certainly 33 percent is not."certainly 33 percent is not."
Herfindahl Index - Merger GuidelinesHerfindahl Index - Merger Guidelines If H is over 1800, "highly concentrated." If If H is over 1800, "highly concentrated." If
1000-1800, "moderately concentrated." 1000-1800, "moderately concentrated." Under 1000,"unconcentrated."Under 1000,"unconcentrated."
Passive vs. Active DemandPassive vs. Active Demand
Network Industries - provider Network Industries - provider decision once, continues until decision once, continues until switchswitch
Other Markets, active choice of Other Markets, active choice of brand for each purchasebrand for each purchase
Implications for Market Implications for Market ShareShare
Traditional analysis implicitly Traditional analysis implicitly assumes active demandassumes active demand
Total Market Share Total Market Share overemphasizes past decisionsoveremphasizes past decisions
Extremely affected by how Extremely affected by how decision is introduceddecision is introduced
ModelModel
Two stage - searching and Two stage - searching and switchingswitching
H - shopping cost H - shopping cost W - incumbent brand equityW - incumbent brand equity E - effort expended to switchE - effort expended to switch
First Stage - ShoppingFirst 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
Second Stage - SwitchSecond 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.
Active MS and New Move Active MS and New Move MSMS
AMS describes real-time decisions, but is AMS describes real-time decisions, but is difficult to measure.difficult to measure.
NMMS approximates AMS when customers NMMS approximates AMS when customers can choose during new-connectcan choose during new-connect
Entire Customer Base
Movers Shoppers
switchers switchers
New Move Market ShareNew Move Market Share
Easy to measure: supplier choices of Easy to measure: supplier choices of new connects are easily observablenew connects are easily observable
Reflects decisions during an ‘active Reflects decisions during an ‘active choice’ timechoice’ time
‘‘Real Time’ measure showing current Real Time’ measure showing current activityactivity
Highlights the importance of Highlights the importance of operational details (sign-up procedures)operational details (sign-up procedures)
Lessons From Lessons From TelecommunicationsTelecommunications
““Success” Case – Long DistanceSuccess” Case – Long Distance ““Failure” Case - LocalFailure” Case - Local
CHART A1.2 - INDICATORS OF AT&T MARKET SHARE
40%
45%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
100%
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
Year
Minutes Revenues (FCC) Revenues (SEC)
Lines International Revenues
Lessons from Long Lessons from Long DistanceDistance
Market share for the incumbent may fall Market share for the incumbent may fall slowly and take a long time to decline to slowly and take a long time to decline to competitive levelcompetitive level
Access charges were discounted to Access charges were discounted to competitorscompetitors
Competitive state may mean only a few Competitive state may mean only a few large providerslarge providers
Short run excess profits may earned by Short run excess profits may earned by incumbent – attracts entryincumbent – attracts entry
Local Market Share GraphLocal Market Share GraphILEC Market Share by Time Period
90.00%
92.00%
94.00%
96.00%
98.00%
100.00%
1992
1993
1994
1995
1996
1997
Dec
-99
Jun-
00
Dec
-00
Jun-
01Time
Mar
ket S
hare
%-a
ge
Revenue Share
End Line Share
Lessons from Local Lessons from Local TelecommunicationsTelecommunications
Barriers to entry is the single most Barriers to entry is the single most important factor in determining important factor in determining competitioncompetition
““All competition is local”All competition is local” Mere presence of competitors is Mere presence of competitors is
insufficientinsufficient
ConclusionsConclusions Traditional Market Share measures do Traditional Market Share measures do
not accurately reflect current decisionsnot accurately reflect current decisions Active Market Share is a better Active Market Share is a better
approach, but is hard to measureapproach, but is hard to measure New Mover Market Share approximates New Mover Market Share approximates
AMS and is easy to measureAMS and is easy to measure Barriers to entry must be monitoredBarriers to entry must be monitored
ReferencesReferences
Loomis, David G. and Eric Malm, “Active Loomis, David G. and Eric Malm, “Active Market Share: Measuring Competitiveness Market Share: Measuring Competitiveness in Retail Energy Markets,” in Retail Energy Markets,” Utilities PolicyUtilities Policy, , Vol. 8 No. 4, 1999.Vol. 8 No. 4, 1999.
Loomis, David G. and Eric Malm, “The Loomis, David G. and Eric Malm, “The Devil in the Details: An Analysis of Default Devil in the Details: An Analysis of Default Service and Switching,” 20th Annual Service and Switching,” 20th Annual Advanced Workshop on Regulation and Advanced Workshop on Regulation and Competition, May 24, 2001. Competition, May 24, 2001.