Customer Poaching and Brand Switching

Drew Fudenberg and Jean Tirole

Harvard Institute of Economic Research Working Papers from Harvard - Institute of Economic Research

Abstract: Firms sometimes try to "poach" the current customers of their competitors by offering them special inducements to switch. We analyze duopoly poaching under both short-term and long-term contracts in two polar cases: either each consumer's brand preferences are constant from one period to the next, or preferences are independent over time. With fixed preferences, poaching induces socially inefficient switching, so welfare is highest when this form of price discrimination is banned; the equilibrium with long- term contracts has less switching than that when only short-term contracts are feasible, so here long-term contracts promote effkiency. With independent preferences, first-period choices do not provide a basis for second-period price discrimination, so the quilibrium with short-term contracts is simply two repetitions of the static equilibrium. and is thus efficient. However. the equilibrium in long-term contracts involves ineffkiently little switching.

Date: 1999
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