Reward Programs and Entry Deterrence
AbstractThis 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.
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Bibliographic InfoPaper provided by Brock University, Department of Economics in its series Working Papers with number 0501.
Length: 17 pages
Date of creation: Aug 2004
Date of revision: Jun 2005
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Reward and Loyalty programs; Barrier to Entry; Entry deterrence; Switching Costs;
Find related papers by JEL classification:
- D4 - Microeconomics - - Market Structure and Pricing
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-06-19 (All new papers)
- NEP-BEC-2005-06-19 (Business Economics)
- NEP-COM-2005-06-19 (Industrial Competition)
- NEP-IND-2005-06-19 (Industrial Organization)
- NEP-MIC-2005-06-19 (Microeconomics)
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