nep-ind New Economics Papers
on Industrial Organization
Issue of 2005‒06‒19
one paper chosen by
Kwang Soo Cheong
Johns Hopkins University

  1. Reward Programs and Entry Deterrence By Lester M.K. Kwong

  1. By: 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.
    Keywords: Reward and Loyalty programs, Barrier to Entry, Entry deterrence, Switching Costs
    JEL: D4 L13
    Date: 2004–08
    URL: http://d.repec.org/n?u=RePEc:brk:wpaper:0501&r=ind

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