School of Economics

Invites you to a

Experimental economics seminar presented by

Dmitry Ryvkin
(Florida State University)

Competition for loyal customers:
An experimental study

 Tuesday 24 October 2023

12.00pm – 1.00pm

Level 6 Seminar Room (650)

A02 Social Sciences Building
Camperdown Campus

The University of Sydney NSW 2006

We consider competition for market shares between two firms that make costly investments to attract and retain customers. The value customers bring to the firms in the next period is higher if these customers are loyal, i.e., they remained with the firm. Based on the retention value and on the prior allocation of market shares, the firms’ equilibrium investments either preserve the status quo or redistribute customers so that one of the firms gains and the other firm loses its market share. We conduct a laboratory experiment to test the theory and investigate the effects of the relative retention value and the initial state of the market on competition. The initial state of the market is either randomly assigned or endogenously generated through a preliminary competition stage. We find that competitors invest more as the customer retention value rises, but only when it is sufficiently high. Investment also rises with initial market share when it is low, but not when it is high. Contrary to predictions, investment at the preliminary stage is exploratory, in that it does not take into account the full dynamic value of competition. Relatedly, we find that, for a given initial market share, investment is lower when this market share is captured endogenously than when it is randomly assigned. We attribute both effects to within-match learning about the competitor’s type.

For further information contact: Experimental economics seminar series coordinator
Dr Jonathan Levy (jonathan.levy@sydney.edu.au)

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