The Dynamic of Competition in Presence of Switching Costs. Lessons from British Gas (1997-2007)

Theoretical models with switching costs have shown that, in a dynamic game, firms have incentives to adopt two-period strategies. Initially firms will 'invest' in markets at an early stage in their development to be able to then 'harvest' at a later stage when consumers are locked-in to the supplier they have previously patronized. This article illustrates, based on a case study: the supply of electricity in Great Britain, that this two-period strategy is not always crowned with success. Specifically, certain firms (in this case British Gas) may have difficulties sustaining customer loyalty in the second phase because customers benefit from a 'learning effect', which in turn lowers their switching costs. Taking these learning effects into account could enrich the range of situations analyzed in the existing economic literature with respect to the understanding of the impact of switching costs on competition.