Strategic Investment in Switching Cost: An Integrated Customer Acquisition and Retention Perspective

Authors:
Ling Xue;Gautam Ray;Andrew Whinston
Affiliations:
McCombs School of Business, University of Texas at Austin, lingxue@mail.utexas.edu;McCombs School of Business, University of Texas at Austin, Gautam.Ray@mccombs.utexas.edu;McCombs School of Business, University of Texas at Austin., abw@uts.cc.utexas.edu
Venue:
International Journal of Electronic Commerce
Year:
2006

Citing 9
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Abstract

This paper considers the interaction between investment to increase Web site stickiness (consumer switching costs) and competition. A duopoly model is used to examine investment by a superior firm to increase consumer switching costs and competition for customer acquisition and customer retention between the investing firm and a noninvesting firm. Gaining a competitive advantage in customer retention is the purpose of strategic technology investment, but the model shows that where consumers are myopic about the benefits they will derive from the technology investment, aggressive price competition by a non-investing firm can prevent the investing firm from acquiring a larger market share and consequently reduce its incentive to invest. However, an investing firm that can persuade consumers of the benefits of the technology investment will have an advantage in customer acquisition and thus may have an incentive to invest.