Essays on consumer loyalty and competition

Bibek Banerjee, Purdue University

Abstract

This thesis examines strategic implications on pricing and advertising decisions of oligopolistic firms in markets where some consumers exhibit brand loyalty. Consumers buy only from those subsets of all the available products or brands that they deem are relevant to them. Therefore a consumer's product choice process consists of two stages: first, considering a brand to be relevant and then choosing a brand from this consideration set. The first essay models the informative and persuasive roles of advertising in a differentiated products duopoly when brand choice involves consideration set formation. The game evolves in two stages: in stage one, firms choose advertising levels simultaneously, which affects the consideration probabilities according to a response function and partitions the market into a loyal segment for each of the firms, and a competitive segment; in stage two the firms choose prices. We show that the dual role of advertising of getting consumers to consider a product and persuading them to make the product choice will give rise to threshold effects in the firms' revenue/profit functions. We find that advertising is not a viable competitive tool for the small firm. Instead the small firm naturally caters to the extremely price sensitive segment of the market. But large advertising spending by the big firm actually increases the small firm's profitability by creating a price umbrella for the latter to take advantage of. The second essay presents a model of localized competition under consumer loyalty and derives the unique symmetric equilibrium prices. It identifies the (synchronicity) condition under which a continuum of asymmetric payoff equivalent equilibria exist, (which can be generalized to models of localized competition of higher dimensions). We compare the symmetric equilibrium distribution prices of (two alternative models of) localized competition to that of the non-localized model. We find, contrary to the established results, that prices under localized competition are lower than those under non-localized competition. We also establish that the pricing strategies under the two types of competition are significantly different: firms stochastically choose between a high and a low price under non-localized competition and offer large discounts, whereas firms generally charge similar (low) prices under localized competition.

Degree

Ph.D.

Advisors

Kovenock, Purdue University.

Subject Area

Economic theory|Marketing|Management

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