Download this Paper Open PDF in Browser

A Path To Consumer Surplus & Loyalty: How Path Dependent Products Result in Lower Prices and Order-Dependent Consumer Loyalty

17 Pages Posted: 18 Jan 2016 Last revised: 3 Nov 2016

Sherzod B. Akhundjanov

Washington State University - School of Economic Sciences

Ben O. Smith

University of Nebraska at Omaha - Department of Economics

Max St. Brown

Oregon Public Utility Commission

Date Written: November 2, 2016

Abstract

In many industries, including technology and design, one product category commonly builds on another. For instance, a smart television product enhances a smart phone. However, because firms can enhance the experience if they produce both products, the utility gained by owning both products from the same firm is greater than the sum of the two products’ utility if purchased from two separate firms. It is reasonable to expect that this would increase the margins of the second product, as it does in aftermarkets. However, we show that in a duopoly environment the additional utility produced by the firms offset each other, while increasing consumer surplus. Further, we show a consumer’s loyalty to a firm’s products is a function of the product release order; given a different release schedule some consumers would be loyal to a different company.

Keywords: Hotelling, Aftermarkets, Bounded Rationality, Complementary Goods, Path Dependance

JEL Classification: L11, L13, D82, D43

Suggested Citation

Akhundjanov, Sherzod B. and Smith, Ben O. and St. Brown, Max, A Path To Consumer Surplus & Loyalty: How Path Dependent Products Result in Lower Prices and Order-Dependent Consumer Loyalty (November 2, 2016). Available at SSRN: https://ssrn.com/abstract=2717505 or http://dx.doi.org/10.2139/ssrn.2717505

Sherzod Akhundjanov

Washington State University - School of Economic Sciences ( email )

P.O. Box 646210
Hulbert Hall 101
Pullman, WA 99164-6210
United States

Ben Smith (Contact Author)

University of Nebraska at Omaha - Department of Economics ( email )

College of Business Administration
60th and Dodge Streets
Omaha, NE 68182
United States

HOME PAGE: http://bensresearch.com

Max St. Brown

Oregon Public Utility Commission ( email )

201 High St SE #100,
Salem, OR 97301
United States

Paper statistics

Downloads
27
Abstract Views
206