Information Asymmetry, Bargaining Power and Customer Profitability: An Empirical Investigation on Bank-Client Relationship

Abstract

The widely accepted business wisdom tells us that maintaining a long-term relationship with customers is more profitable than acquiring new customers, but very limited empirical evidence supports this viewpoint. The inconsistent findings in prior research suggest that some factors may influence the customer lifetime-profitability relationship. In this study, we develop and test a framework in which information asymmetry and bargaining power play important roles in the bank-client relationship. We find that although the price premium is determined by the degree of information asymmetry, the patterns of how price premium changes over a bank-client relationship are actually determined by customers' relative bargaining power. Specifically, the bank chooses a decreasing pricing strategy to retain its customer, but takes a more aggressive increasing strategy with a lower-than-equilibrium initial price to acquire large customers. However, the increasing pricing strategy, although helps acquire important customers, brings in a greater risk of loosing customers. The bank should strengthen its relationship with firms by cross-selling more products and services to lock-in its customers. This study reveals a more complex nature of customer profitability, which is influenced by information asymmetry between a bank and its clients, and bargaining power of clients.