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Customer Learning and Loyalty When Quality is Uncertain

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  • Noah Gans

Abstract

A consumer has repeated contacts with a set of product or service providers. Each visit to a supplier yields the consumer some randomly distributed utility. The suppliers' utility distributions are unknown to the consumer, and to decide which supplier to visit, she uses a myopic variant of the decision rule used by a classical, utility-maximizing Bayesian. This rule is designed to be roughly consistent with empirical findings regarding individual choice under uncertainty. For this model, we develop closed-form expressions that characterize both short-term and long-term measures of customer loyalty to a supplier. These results offer a rich picture of how consumer discrimination and prior beliefs interact with the level of quality actually offered by suppliers to determine customer loyalty.

Suggested Citation

  • Noah Gans, 1999. "Customer Learning and Loyalty When Quality is Uncertain," Center for Financial Institutions Working Papers 99-11, Wharton School Center for Financial Institutions, University of Pennsylvania.
  • Handle: RePEc:wop:pennin:99-11
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    File URL: http://fic.wharton.upenn.edu/fic/papers/99/9911.pdf
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    Cited by:

    1. Dana, James D, Jr, 2001. "Competition in Price and Availability When Availability is Unobservable," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 497-513, Autumn.

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