Abstract
This article investigates service and price competition in a variety seeking market, with the consideration of brand name awareness on consumers. Variety seeking behavior is modeled as a decrease in the willingness to pay for product purchased on the previous occasion. Under a three-stage Hotelling-type model, we show that variety seeking intensifies the competition when both firms are equally known. However, when one firm is better known than the other, it softens the competition observing the differentiation of equilibrium policies. In addition, variety seeking increases both the price and service gaps to exaggerate market differentiation. Under both scenarios firms adjust the service level in the second period so as to prevent consumers from switching, if keeping prices committed across periods. Furthermore, if consumers on average have a higher propensity to one firm, the variety seeking behavior leads to a higher total profits and a higher consumer surplus.
Highlights
Variety often motivates consumers to switch inertia keeps them coming back
With the duopoly market, in two periods games, N firms compete on the service levels with price commitment, and there are θ consumers with variety seeking distributed uniformly in the market, 0 £ θ £1
Our results showed that variety seeking did not affect the price of both firm and the average consumers surplus, the quality in Period 2 will be improved and in Period 1 will be decreased, the total profits of the market will be less than that without variety seeking, and we can conclude that the firms need to pay the cost for the potential loss of market share resulting of variety seeking
Summary
Variety seeking in consumer choices has been studied in marketing since decades ago (See, e.g., Bass et al, 1972; Che & Sudhir, 2007; Kahn et al, 1986). A well-accepted explanation is that consumers will be less attracted or get bored by the repeat purchasing (Jeuland, 1978; McAlister, 1982; McAlister & Pessemier, 1982). Along with this negative state dependence, the variety seeking behavior can be captured by a staying cost (Seetharaman & Che, 2009), or an attractiveness reduction for the previously purchased brand (Sajeesh & Raju, 2010). Following Sajeesh and Raju (2010), this article operationalizes variety seeking as a reduction in the willingness to pay for repetitive purchasing
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