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Reward Programs and Entry Deterrence

Author

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  • Lester M.K. Kwong

    () (Department of Economics, Brock University)

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.

Suggested Citation

  • Lester M.K. Kwong, 2004. "Reward Programs and Entry Deterrence," Working Papers 0501, Brock University, Department of Economics, revised Jun 2005.
  • Handle: RePEc:brk:wpaper:0501
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    File URL: https://brocku.ca/repec/pdf/0501.pdf
    File Function: Revised version, 2005
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    More about this item

    Keywords

    Reward and Loyalty programs; Barrier to Entry; Entry deterrence; Switching Costs;

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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