Customer poaching with retention strategies

Abstract

This paper is a first step in investigating the competitive and welfare effects of behaviour-based price discrimination (BBPD) in markets where firms have information to employ re-tention strategies as an attempt to raise barriers to switching. We focus on retention activity in the form of a discount offered to a consumer expressing an intention to switch. When save activity is allowed forward looking firms anticipate the effect of first period market share on second period profits and so they price more aggressively in the first-period. Thus, first period equilibrium price with BBPD and save activity is below its non-discrimination coun-terpart. This contrasts with first period price above the non-discrimination level if BBPD is used and save activity is forbidden. Regarding second period prices, retention discounts increase the price offered to those consumers who do not signal am intention to switch. The reverse happens to those consumer who decide to switch after being exposed to retention offers. As in other models where consumers have stable exogenous brand preferences, the instrument of behaviour based price discrimination is bad for profits and welfare but good for consumers. However, BBPD with the additional tool of retention activity boosts consumer surplus and overall welfare but decreases industry profit. 1

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