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Loyalty inducing programs and competition with homogeneous goods

Author

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  • Nicolás Figueroa
  • Ronald Fischer
  • Sebastian Infante

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Abstract

We analyze a market where two firms producing a homogenous good compete by means of two mechanisms: prices and a loyalty bonus. We assume that firms act simultaneously when posting their loyalty bonus and prices. Consumers who purchase from a firmin the first period must return the bonus in case they switch providers in the second period. They fully anticipate the effects on future prices of accepting the bonus and maximize their total surplus over both periods. We first show that there is no equilibrium with prices and bonuses equal to zero. We then show the existence of a SPNE where firms are able to obtain half the monopoly profits using large bonuses in the first period and high prices in the second period. We completely characterize all the symmetric equilibria of the game and show that, in general, firms obtain positive profits even when they compete in prices, the good is homogenous, and consumers are forward-looking. Finally we show that if firms are allowed to discriminate between old and new customers, the standard zero price equilibria reappear. JEL Classification: L13.

Suggested Citation

  • Nicolás Figueroa & Ronald Fischer & Sebastian Infante, 2008. "Loyalty inducing programs and competition with homogeneous goods," Documentos de Trabajo 249, Centro de Economía Aplicada, Universidad de Chile.
  • Handle: RePEc:edj:ceauch:249
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    File URL: http://www.dii.uchile.cl/~cea/sitedev/cea/www/download.php?file=documentos_trabajo/ASOCFILE120081008163854.pdf
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    References listed on IDEAS

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    1. Sebátian Infante & Nicolás Figueroa & Ronald Fischer, 2007. "Competition with asymmetric switching costs," Documentos de Trabajo 241, Centro de Economía Aplicada, Universidad de Chile.
    2. Joseph Farrell & Carl Shapiro, 1988. "Dynamic Competition with Switching Costs," RAND Journal of Economics, The RAND Corporation, vol. 19(1), pages 123-137, Spring.
    3. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 375-394.
    4. Padilla, A. Jorge, 1992. "Mixed pricing in oligopoly with consumer switching costs," International Journal of Industrial Organization, Elsevier, vol. 10(3), pages 393-411, September.
    5. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-659, September.
    6. Yongmin Chen, 1997. "Paying Customers to Switch," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(4), pages 877-897, December.
    7. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 515-539.
    8. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-666, May.
    9. Shilony, Yuval, 1977. "Mixed pricing in oligopoly," Journal of Economic Theory, Elsevier, vol. 14(2), pages 373-388, April.
    10. Basu, Kaushik & Bell, Clive, 1991. "Fragmented duopoly : Theory and applications to backward agriculture," Journal of Development Economics, Elsevier, vol. 36(2), pages 145-165, October.
    11. Caminal, Ramon & Matutes, Carmen, 1990. "Endogenous switching costs in a duopoly model," International Journal of Industrial Organization, Elsevier, vol. 8(3), pages 353-373, September.
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    Cited by:

    1. Alexandre Janiak, 2008. "Welfare in models of trade with heterogeneous firms," Documentos de Trabajo 253, Centro de Economía Aplicada, Universidad de Chile.
    2. Viviana Fernández & Brian M. Lucey, 2008. "Emerging Markets Variance Shocks: Local or International in Origin?," Documentos de Trabajo 251, Centro de Economía Aplicada, Universidad de Chile.

    More about this item

    JEL classification:

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

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