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.