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Retail competition with switching consumers in electricity markets

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  • Ruiz Mora, Carlos
  • Nogales Martín, Francisco Javier
  • Prieto Fernández, Francisco Javier

Abstract

The ongoing transformations of power systems worldwide pose important challenges,both economic and technical, for their appropriate planning and operation. A key approach to improve the efficiency of these systems is through demand-side management, i.e., to promote the active involvement of consumers in the system. In particular, the current trend it to conceive systems where electricity consumers can vary their load according to real-time price incentives, offered by retailing companies.Under this setting, retail competition plays an important role as inadequate prices orservices may entail consumers switching to a rival retailer. In this work we consider a game theoretical model where asymmetric retailers compete in prices to increase their profits by accounting for the utility function of consumers. Consumer preferences for retailers are uncertain and distributed within a Hotelling line. We analytically characterize the equilibrium of a retailer duopoly, establishing its existence and uniqueness conditions. Furthermore, sensitivities of the equilibrium prices with respect to relevant model parameters are also provided. The duopoly model is extended to a multiple retailer case for which we perform an empirical analysis via numerical simulations. Results indicate that, depending on the retailer costs, loyalty rewards and initial market shares, the resulting equilibrium can range from complete competition to one in which a retailer have a leading or even a dominant position in the market, decreasing the consumers' utility significantly. Moreover, the retailer network configuration also plays an important role in the competitiveness of the system

Suggested Citation

  • Ruiz Mora, Carlos & Nogales Martín, Francisco Javier & Prieto Fernández, Francisco Javier, 2015. "Retail competition with switching consumers in electricity markets," DES - Working Papers. Statistics and Econometrics. WS ws1522, Universidad Carlos III de Madrid. Departamento de Estadística.
  • Handle: RePEc:cte:wsrepe:ws1522
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    References listed on IDEAS

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    1. Paul Joskow & Jean Tirole, 2006. "Retail electricity competition," RAND Journal of Economics, RAND Corporation, vol. 37(4), pages 799-815, December.
    2. Farrell, Joseph & Klemperer, Paul, 2007. "Coordination and Lock-In: Competition with Switching Costs and Network Effects," Handbook of Industrial Organization, Elsevier.
    3. Muller, Moritz & Sensfu[ss], Frank & Wietschel, Martin, 2007. "Simulation of current pricing-tendencies in the German electricity market for private consumption," Energy Policy, Elsevier, vol. 35(8), pages 4283-4294, August.
    4. Paulo Somaini & Liran Einav, 2013. "A Model of Market Power in Customer Markets," Journal of Industrial Economics, Wiley Blackwell, vol. 61(4), pages 938-986, December.
    5. Andrew Rhodes, 2014. "Re-examining the effects of switching costs," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(1), pages 161-194, September.
    6. Yongmin Chen & Michael H. Riordan, 2007. "Price and Variety in the Spokes Model," Economic Journal, Royal Economic Society, vol. 117(522), pages 897-921, July.
    7. Oliveira, Fernando S. & Ruiz, Carlos & Conejo, Antonio J., 2013. "Contract design and supply chain coordination in the electricity industry," European Journal of Operational Research, Elsevier, vol. 227(3), pages 527-537.
    8. repec:rje:randje:v:37:y:2006:i:4:p:799-815 is not listed on IDEAS
    9. Paul Klemperer, 1987. "The Competitiveness of Markets with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 18(1), pages 138-150, Spring.
    10. Chris M. Wilson & Catherine Waddams Price, 2010. "Do consumers switch to the best supplier?," Oxford Economic Papers, Oxford University Press, vol. 62(4), pages 647-668, October.
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    Keywords

    Elastic consumers;

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