How Does Customer Recognition Affect Service Provision?

Abstract

Providing customer service is important for firms to acquire new customers and retain repeat customers in a competitive marketplace. As technology advances, firms can recognize customers from their purchase history data and price discriminate between repeat and new customers. Existing literature has examined how customer recognition affects firms' pricing decisions in centralized channels. In this article, we examine how customer recognition affects service provision in centralized and decentralized channels. We also assess how customer recognition affects firm profits, consumer surplus, and social welfare with endogenous service provision. We find that the implications of customer recognition depend on channel structure, which channel members have the capability of customer recognition, and the degree to which investment in service provision diminishes over time. In centralized channels, customer recognition reduces (increases) service levels if service investment persists (diminishes) sufficiently over time. In decentralized channels, when only retailers can recognize customers, service levels are higher than when retailers cannot recognize customers. However, when both manufacturers and retailers can recognize customers, service levels are lower (higher) than when they cannot recognize customers if service investment persists (diminishes) sufficiently over time. Moreover, in centralized channels, customer recognition reduces firm profits and consumer surplus, whereas in decentralized channels, when manufacturers and retailers can recognize customers, channel members' profits increase while consumer surplus decreases from their levels without customer recognition.