| 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 |