Competition for Loyal Customers

Alexander Usvitskiy () and Dmitry Ryvkin
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Alexander Usvitskiy: School of Advanced Studies

Working Papers from Department of Economics, Florida State University

Abstract: We consider competition for market shares between two firms that make costly investments to attract and retain customers. The value customers bring to the firms in the next period is higher if these customers are loyal, i.e., they remained with the firm. Based on the retention value and on the prior allocation of market shares, the firms' equilibrium investments either preserve the status quo or redistribute customers so that one of the firms gains and the other firm loses its market share. We conduct a laboratory experiment to test the theory and investigate the effects of the relative retention value and the initial state of the market on competition. The initial state of the market is either randomly assigned or endogenously generated through a preliminary contest between the firms. We find that competitors invest more as the customer retention value rises, but only when it is sufficiently high. Investment also rises with initial market share when it is low, but not when it is high. Somewhat surprisingly, we find that, for a given initial market share, investment is lower when this market share is endogenously won than when it is randomly assigned, which we attribute to within-match learning about the competitor's type.

Keywords: Competition; Loyalty; Market shares; Dynamic game; Laboratory experiment (search for similar items in EconPapers)
JEL-codes: C72 C92 D21 L21 (search for similar items in EconPapers)
Pages: 41
Date: 2022-10
New Economics Papers: this item is included in nep-bec, nep-com, nep-exp, nep-gth and nep-ind
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