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Reward Programs and Entry Deterrence

Lester Kwong ()

No 501, Working Papers from Brock University, Department of Economics

Abstract: This paper seeks to endogenize consumer switching costs by considering simple reward programs in the form of a price discount on future purchases for current consumers to a firm. In a two period model with a more cost efficient potential entrant, we show that for sufficiently low entry costs, the introduction of a reward program by an incumbent is never optimal. For intermediate values of the entry cost, there exists a bounded interval of rewards under which entry can be successfully deterred. Nevertheless, the desirability for the incumbent to preclude entry is solely contingent on the relative cost efficiency of the entrant.

Keywords: Reward and Loyalty programs; Barrier to Entry; Entry deterrence; Switching Costs (search for similar items in EconPapers)
JEL-codes: D4 L13 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2004-08, Revised 2005-06
New Economics Papers: this item is included in nep-bec, nep-com, nep-ind and nep-mic
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Downloads: (external link) Revised version, 2005 (application/pdf)

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