Blinded By the Sun: Incumbent Response to Shifting Customer Demands in Regulated Electricity Markets

Abstract

An understudied question in the strategy literature is whether firms in regulated, monopoly-like, markets respond to uncoordinated customer preferences. Conventional wisdom would suggest that due to high barriers to entry and low buyer bargaining power in these markets, customer influence on incumbent firms is minimal to non- existent. Our findings, however, suggest that firms in regulated, monopoly-like, markets may not be as immune to demand-side customer preferences as previously thought. We draw on the competitive dynamic literature to suggest that under certain conditions, technological innovation may offer customers access to products or services previously only provided by an incumbent firm. As a result, the incumbent firm faces new competitive pressures even in monopoly markets. We find that incumbent utilities respond to customers’ adoption of distributed solar. We also identify important boundary conditions that moderate this effect. We test our hypotheses on a dataset of incumbent utilities’ solar investments and customers’ adoption of distributed solar from 2010 to 2017 in the U.S. electric utility industry. Our findings contribute to understanding how firms in regulated, monopoly-like markets respond to demand-side influences, despite a lack of competitive pressures from rival firms.