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To fight or not to fight: service commitment and price competition in differentiated markets

Author

Listed:
  • Junhyun Bae

    (Oakland University)

Abstract

We study how service commitment would impact the firms' price decisions under competition over two periods, following the switching cost model of Klemperer (1987). Among many different types of switching costs observed in practice, we analyze the case where customer switching behavior is determined by previous experience, such as superior/inferior service quality. We show that even if two firms could make more profits with low service quality, they would end up playing either the Prisoner's Dilemma game by making homogeneous decisions (high service quality) or the game of Chicken by making heterogeneous decisions (high and low service quality). Second, our paper shows that if the service cost is high enough, the two firms could choose not to invest in services (low service quality). However, if the service cost is low enough, they would end up playing either the Prisoner's Dilemma game or the game of Chicken again.

Suggested Citation

  • Junhyun Bae, 2024. "To fight or not to fight: service commitment and price competition in differentiated markets," Economics Bulletin, AccessEcon, vol. 44(3), pages 990-996.
    • Handle: RePEc:ebl:ecbull:eb-24-00074
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    File URL: http://www.accessecon.com/Pubs/EB/2024/Volume44/EB-24-V44-I3-P76.pdf
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    More about this item

    Keywords

    price competition; switching cost; customer loyalty; service commitment;
    All these keywords.

    JEL classification:

    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics
    • D4 - Microeconomics - - Market Structure, Pricing, and Design

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