Customer Loyalty and Supplier Quality Competition

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Operations, Information and Decisions Papers
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Customer loyalty
quality competition
bayesian bandit
Operations and Supply Chain Management
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Gans, Noah
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We develop a model of customer choice in response to random variation in quality. The choice model yields closed-form expressions which reflect the effect of competing suppliers’ service quality on the long-run fraction of purchases a customer makes at the various competitors. We then use the expressions as the basis of simple normative models for suppliers seeking to maximize their long-run average profits. The results provide insight into the effect of switching behavior on the service levels offered by competing suppliers.

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2002-02-01
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Management Science
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