Date of this Version
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.
Customer loyalty, quality competition, bayesian bandit
Gans, N. (2002). Customer Loyalty and Supplier Quality Competition. Management Science, 48 (2), 207-221. http://dx.doi.org/10.1287/mnsc.18.104.22.1686
Date Posted: 27 November 2017
This document has been peer reviewed.