Supplier Surfing: Competition and Consumer Behavior in Subscription Markets

Abstract

I explore the practice of offering subscribers enticements to switch suppliers. This type of competition is natural in subscription markets for homogeneous goods and services. Efficiency is impaired because subscribers are induced to expend resources changing suppliers. Subscription markets are fully competitive only when three or more firms serve the industry. In this case, the price offered to switchers is below cost, while nonswitchers pay a premium. Each firm earns rent on its customer base, but zero expected profit on each new subscriber it attracts. When firms can track switching behavior, consumers may change suppliers in order to establish reputations. Copyright 2003 by the RAND Corporation.