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
Date Written: November 2, 2016
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: Suggested Citation