Competitive One-to-One Promotions
One-to-one promotions are possible when consumers are individually addressable and firms know something about each customer's preferences. We explore the competitive effects of one-to-one promotions in a model with two competing firms where the firms differ in size and consumers have heterogeneous brand loyalty. We find that one-to-one promotions always lead to an increase in price competition (average prices in the market decrease). However, we also find that one-to-one promotions affect market shares. This market-share effect may outweigh the effect of lower prices, benefiting the firm whose market share increases. Our results suggest that of two firms, the firm with the higher-quality product may gain from one-to-one promotions. Our model also has implications for the phenomenon of customer churn, where consumers switch to a less preferred brand due to targeted promotional incentives. We show that churning can arise optimally from firms pursuing a profit-maximizing strategy. Instead of trying to minimize it, the optimal way to manage customer churn is to engage in both offensive and defensive promotions with the relative mix depending on the marginal cost of targeting.
Volume (Year): 48 (2002)
Issue (Month): 9 (September)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Narasimhan, Chakravarthi, 1988. "Competitive Promotional Strategies," The Journal of Business, University of Chicago Press, vol. 61(4), pages 427-49, October.
- Drew Fudenberg & Jean Tirole, 1999.
"Customer Poaching and Brand Switching,"
Harvard Institute of Economic Research Working Papers
1871, Harvard - Institute of Economic Research.
- Bester, H. & Petrakis, E., 1994.
"Coupons and Oligopolistic Price Discrimination,"
1994-12, Tilburg University, Center for Economic Research.
- Lederer, Phillip J & Hurter, Arthur P, Jr, 1986. "Competition of Firms: Discriminatory Pricing and Location," Econometrica, Econometric Society, vol. 54(3), pages 623-40, May.
- Banks, J. & Moorthy, S., 1994.
"A Model of Price Promotions with Consumer Search,"
95-01, Rochester, Business - Marketing Science.
- Greg Shaffer & Z. John Zhang, 2000. "Pay to Switch or Pay to Stay: Preference-Based Price Discrimination in Markets with Switching Costs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 9(3), pages 397-424, 06.
- Ram C. Rao, 1991. "Pricing and Promotions in Asymmetric Duopolies," Marketing Science, INFORMS, vol. 10(2), pages 131-144.
- Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
- Shaffer, G. & Zhang, Z.J., 1994. "Competitive Coupon Targeting," Papers 94-02, Michigan - Center for Research on Economic & Social Theory.
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:48:y:2002:i:9:p:1143-1160. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If references are entirely missing, you can add them using this form.