Vertical Integration versus First-Mover Advantage — Which is worse?

Vertical integration is said to provide an advantage over non-integrated firms. Therefore, regulatory agencies are strongly interested in separating former fully integrated monopolies in energy markets. In this paper we analyse whether - besides vertical integration - incumbents experience a first-mover advantage in the sense that customers have to switch from an incumbent's standard contract. Customers who have not yet switched (nearly 60 percent in Germany) still stay in the standard contract and do so at a significantly higher price than the lowest price in the market. When assuming that customers switch only to lower price contracts, new providers are able to enter a market profitably only if their prices are below the standard contract prices. Therefore, incumbents might have a first-mover advantage as they are in the position to define the playing field of competition in their home market.