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Market Share in Generation: The Impact of Retail Competition on Investor-Owned Utilities

Fortnightly Magazine - July 1 1998

the loss in market share over the first two years following retail competition ranges from 13 percent to 21 percent of the utility's residential load, 14 percent to 21 of its commercial load, and 40 percent to 62 percent for industrial customers, depending on the size of the shopping credit. While these estimates of lost market share are well more than the pre-retail competition estimates shown in Table 1, the data indicate that at least some of an incumbent utility's existing customers may be retained following retail competition, depending on the magnitude of the shopping credit.

Besides estimates of market share, the study also suggests the rate at which competitors are likely to "eat away" at an incumbent generator's market share following retail competition. If the incumbent does nothing to boost brand awareness, the predicted reductions in market share following the loss of an exclusive franchise are 20 percent immediately, reaching 75 percent of eventual erosion by the end of the first year. The remaining 25 percent market share loss occurs during the second year of of retail competition. %n6%n So, although the incumbent takes an initial hit, the rate of market share loss tends to slow rather than accelerate over time.

Scott T. Jones is CEO and Matthew B. Krepps is principal at The

Economics Resource Group Inc., a consulting firm in Cambridge, Mass.

1 The sensitivity of sales to price changes is directly related to the number of close substitutes for electricity generated by the incumbent utility. The dramatic increase in the closeness and number of substitutes available under competition implies that historical demand elasticities provide only a lower bound on true demand elasticities under open retail competition.

2 For example, see Robert Halvorsen, Econometric Models of U.S. Energy Demand, 1975. For a survey of the empirical literature, see Douglas R. Bohi. Analyzing Demand Behavior, A Study of Energy Elasticities, 1981.

3 NiMo put testimony before the New York State Public Service Commission (Case 96-E-0134) in 1996 that included data used to generate estimates of short-to-intermediate term demand elasticities (up to three years forward) across rate classes.

4 Bohi, op. cit., and John E. Kwoka Jr., Power Structure, Ownership, Integration and Competition in the U.S. Electricity Industry, 1996.

5 A selection of the most relevant articles from the drug industry include the following: G. Urban, et al., "Market Share Rewards to Pioneering Brands: An Empirical Analysis and Strategic Implications," Management Science, Vol. 32, No. 6, June 1986, pp. 645-659; R. Caves, et al., "Patent Expiration, Entry and Competition in the U.S. Pharmaceutical Industry," Brookings Papers on Economic Activity, 1991, pp. 1-66.; H. Grabowski and

J. Vernon, "Brand Loyalty, Entry and Price Competition in Pharmaceuticals after the 1984 Drug Act," The Journal of Law & Economics, October 1992, pp. 331-350; S. Ellison, et al., "Characteristics of Demand for Pharmaceutical Products: An Examination of Four Cephalosporins," RAND Journal of Economics, Vol. 28, No. 3, Autumn 1997, pp. 426-446; R. Frank and D. Salkever, "Generic Entry and the Pricing of Pharmaceuticals," NBER Working Paper Series, Working Paper 5306, October 1995; R. Frank and