High Customer Loyalty Reduces Competition and Demand Elasticity
When consumers have strong preferences for a product's specific characteristics, demonstrating high loyalty, the intensity of competition between firms is reduced. This brand or product loyalty makes the demand for each firm's product less elastic, as customers are less sensitive to price changes. This, in turn, grants firms the market power to set and sustain higher prices.
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CORE Econ
Economics
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.7 The firm and its customers - The Economy 2.0 Microeconomics @ CORE Econ
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Dominant Strategy Equilibrium with High Customer Loyalty in the Windsurfing/Kitesurfing Game
The Low-Loyalty Windsurfing/Kitesurfing Game as a Prisoners' Dilemma
Activity: Evaluating Statements on the Windsurfing/Kitesurfing Game (Figure 7.25)
High Customer Loyalty Reduces Competition and Demand Elasticity
Low Customer Loyalty Leads to Intense Competition, Elastic Demand, and Lower Prices
Learn After
Pricing Power in a Competitive Market
Two competing smartphone companies, 'Innovate Inc.' and 'Connect Co.', operate in a market. Innovate Inc. has cultivated a very strong brand following, with customers who are exceptionally loyal due to its unique operating system and design. Connect Co. decides to launch a major promotional campaign, cutting the price of its comparable smartphone by 20%. Based on the principles of market competition and consumer behavior, what is the most probable immediate impact on Innovate Inc.?
Customer Loyalty and Pricing Power
Match each market condition to its resulting impact on competition and pricing power.
Two competing firms, Firm Alpha and Firm Beta, can each choose to set a High Price or a Low Price for their products. The following two payoff matrices represent the profits (Alpha's Profit, Beta's Profit) under two different market scenarios.
Scenario 1:
- Both choose High: ($100, $100)
- Alpha High, Beta Low: ($30, $120)
- Alpha Low, Beta High: ($120, $30)
- Both choose Low: ($60, $60)
Scenario 2:
- Both choose High: ($100, $100)
- Alpha High, Beta Low: ($80, $110)
- Alpha Low, Beta High: ($110, $80)
- Both choose Low: ($60, $60)
Analyze the two scenarios. Which scenario represents a market with high customer loyalty, and what is the correct reasoning?
Evaluating a Competitive Pricing Strategy
A company observes that whenever its main competitor lowers its product price by 10%, the company loses 30% of its customers to that competitor. This market behavior strongly suggests that the company's customers exhibit high brand loyalty.
Interpreting Pricing Power in a Local Market
The Link Between Brand Preference and Pricing Control
Two airlines, 'Prestige Air' and 'Budget Fly,' are the only carriers on a specific route. Prestige Air has a renowned loyalty program and a reputation for excellent service, resulting in a large base of dedicated frequent flyers. Budget Fly competes primarily on price. If Budget Fly initiates a price war by significantly cutting its fares, which of the following outcomes is the most predictable consequence?