Cross-market network effect with asymmetric customer loyalty: implications for competitive advantage

Cross-market network effect with asymmetric customer loyalty: implications for competitive advantage

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Article ID: iaor20082224
Country: United States
Volume: 26
Issue: 1
Start Page Number: 52
End Page Number: 66
Publication Date: Jan 2007
Journal: Marketing Science
Authors: ,
Abstract:

Across-market network effect exists in many industries (e.g., newspaper publishing, media, software) in which a seller sells both a primary and a secondary product (e.g., a newspaper publisher sells newspapers to readers and advertising space to advertisers), and the value of the secondary product depends on the size of the user base of the primary product. This paper examines the competitive implications of asymmetric customer loyalty in such markets. In traditional markets, an advantage in customer loyalty generates a profit advantage. We show here, however, that in the presence of a cross-market network effect, a midlevel of loyalty advantage in the primary product market can lead to an overall profit disadvantage. This surprising result is derived from the interdependence of the two markets, whereby a profit in one market may be gained at the cost of the other, and by the positive relationship between a larger loyalty segment and a higher opportunity cost of price competition in the product of the primary market. Extending our model to a two-period entry game also shows that under certain conditions, the entrant with disadvantage in customer loyalty can outperform the incumbent in profit and market share. This result suggests that asymmetry in customer loyalty can be a source of ‘first-mover’ advantage or disadvantage.

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