Page 4: Increasing market share
Growth involves a firm retaining its existing customers and persuading other suppliers’ customers to ‘switch’. The instruments of persuasion are advertising, quality of service and price. Pricing is a tricky area. The temptation is to gain market share by undercutting other suppliers’ prices. Strict rules apply here, however. These include:
- no predatory pricing - no supplier must entice customers away with initial prices that fail to cover the cost of supply
- no price discrimination – between existing, established customers and new customers. Any ‘special price offer’ to new customers must also be offered to existing customers.
These rules are vital. The electricity industry has a massive infrastructure. The capital tied up is colossal, and the industry’s fixed costs are huge. By contrast, the cost of supplying one extra unit of electricity from within existing productive capacity is extremely low.
Environmental concerns are making firms become more energy efficient. As a result, the overall rate of growth in the energy market is comparatively slow. So, if an individual energy supply company is to grow, it will do so mainly at the expense of other suppliers.
Not surprisingly, some suppliers are bidding to own their own power stations. Ofgem monitors this and all other takeover activity with a view to preventing any market dominance. The new market arrangements are beginning to settle down. Firms know ‘the rules’ and recognise the determination of Ofgem to enforce them. Not all firms are benefitting equally. In the gas industry, British Gas, which used to have a monopoly, is experiencing a fall in market share, whilst firms such as Northern Electric are experiencing a rise.