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Habit Forming Consumers and Firm Dynamics

17 Pages Posted: 21 Feb 2023 Publication Status: Published

See all articles by Arthur Fishman

Arthur Fishman

Bar-Ilan University - Department of Economics

Avi Weiss

Bar-Ilan University - Department of Economics; Taub Center for Social Policy Studies in Israel; IZA Institute of Labor Economics

Ziv Hellman

Bar-Ilan University

Abstract

In many markets consumers form long-term relationships with firms. In such settings, a firm's existing customers are valuable assets whose 'loyalty' must be maintained through continued investment. In this paper we assume that consumer loyalty is strengthened by repeated buying but may erode if the relationship is interrupted. In this context we show how a firm's history of costs and sales and the size of its customer base determine the extent to which it invests in maintaining its long term customer relationships by satisfying demand even when this involves a short-term loss. We show that for appropriate parameters, firms whose customer base is still small, and its customers' loyalty tenuous, invest to establish and reinforce customer loyalty and grow its customer base. However, once a firm is sufficiently large and its customers' habit sufficiently entrenched, its incentive to invest in customer retention declines and it stocks the product only when this is profitable in terms of current profit.

Keywords: firm dynamics, firm growth, habit formation, consumer dynamics

Suggested Citation

Fishman, Arthur and Weiss, Avi and Hellman, Ziv, Habit Forming Consumers and Firm Dynamics. Available at SSRN: https://ssrn.com/abstract=4366215 or http://dx.doi.org/10.2139/ssrn.4366215

Arthur Fishman (Contact Author)

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 52900
Israel
972-3-531-8366 (Phone)
972 3 535 3180 (Fax)

Avi Weiss

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 52900
Israel
+972 3 531 8934 (Phone)
+972 3 535 3180 (Fax)

Taub Center for Social Policy Studies in Israel ( email )

15 Ha'ari Street
Jerusalem
Israel

HOME PAGE: http://taubcenter.org.il/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Ziv Hellman

Bar-Ilan University ( email )

Ramat Gan
Ramat Gan, 52900
Israel

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