Finite Brand Loyalty and Equilibrium Price Promotions
42 Pages Posted: 9 Oct 2008
Date Written: June 2005
The extant literature on price promotions typically assumes thatconsumers loyal to a brand never switch to a competing brand, withShilony (1977) and Raju et al (1990) being exceptions. Extendingthe Narasimhan (1988) model, we allow loyal consumers to hold finitebrand loyalty. Our unique equilibrium splits into three types, dependingupon configurations of consumer reservation utility, brand strengthand switcher population. The type of equilibrium for high brand loyaltycorresponds to the one in Narasimhan (1988). The remainingtwo types for intermediate and low brand loyalty demonstrate strikinglydifferent properties. First, the strong brand has a higher pricerange and a higher regular price. Second, the strong brand has ahigher (lower) average promotional depth than the weak brand whenthe switcher population is small (large). Third, both brands promoteequally frequently when brand loyalty is relatively low. Therefore, thisanalysis hopefully provides a more complete picture about firmsâ promotionaldecisions for all possible levels of brand loyalty and switcherpupulation.
Keywords: Price promotions, Brand loyalty, Private labels
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