Customer Loyalty and Supplier Strategies for Quality Competition

We analyze a model of consumer response to variation in product or service quality. The model, developed in [4], provides closed-form expressions that characterize short-term and long-term measures of customer loyalty to a supplier. In this paper, we develop sensitivity analyses that offer a rich characterization of how factors - such as the underlying quality levels of the suppliers, the customer's ability to distinguish between good and bad suppliers, and the customer's prior beliefs regarding the suppliers affect both short-term and long-term loyalty. We also use the expressions to develop simple normative models for suppliers that wish to develop effective quality strategies.