On the Profitability of Loyalty.

This article develops an analytical framework to characterize repeat-purchase customer loyalty and its profitability in a dynamic duopoly competition with two horizontally differentiated firms. It distinguishes between loyalty driven by switching costs ("behavioral loyalty") and loyalty driven by positive brand preferences ("attitudinal loyalty"), analyzing their effects under scenarios of global and local consumer preference changes. The study finds that while switching costs increase repeat-purchase loyalty, this loyalty is not profitable for firms because it intensifies price competition and lowers equilibrium prices. Conversely, loyalty driven by strong and stable brand preferences can be profitable, especially when consumer preferences evolve locally and remain relatively stable over time; however, under global preference changes, stronger brand preference may reduce loyalty despite increasing profits. The paper's results highlight the nuanced relationship between customer loyalty and firm profitability, emphasizing the importance for firms to understand the underlying drivers of loyalty rather than relying solely on repeat-purchase behavior as a profitability indicator.