Retailer’s Optimal Pricing When Considering Customer Loyalty

Customer loyalty to firms influences consumers’ purchase behavior. In a monopoly market, loyal customers directly purchase goods from one firm without purchase cost; while, strategic customers search proper goods and spend extra search cost. In a competitive market, loyal customers focus on their favorite firms and purchase goods from them; however, strategic customers compare firms’prices and service rates, and then choose one firm in which they can obtain high expected surplus to purchase the goods, so they suffer an additional evaluate cost. Comparing with loyal customers, purchase process of strategic customers is much more complex, compare more elements and incur higher purchase cost. Due to the strategic behavior of strategic customers, firms tend to compete in market share of strategic customers by lowering prices.In a monopoly market, we firstly discuss the rational expectation pricing model of homogeneous customers in which all customers hold the same value of goods and have rational expectations of firm’s service rate. Then, release these assumptions, we analyze the rational expectation pricing model of heterogonous customers and the irrational expectation pricing model of homogeneous customers, respectively. Results show that customers’uncertainty in goods’values and firm’s service rates lower firm’s optimal quantity, but may also decrease customers’expected surplus. Finally, based on the rational expectation pricing model of homogeneous customers, we analyze firm’s optimal price and pricing strategy. With the increasing of the firm’s optimal price, its optimal quantity and service rate increase. The firm’s optimal pricing strategy in a single period model may not equal to that in a multi-period model, In a multi-period model, the firm’s optimal pricing strategy is influenced by customers’sensitivity to stockouts.In a competitive market, for analyzing roles of costs and proportions of loyal customers in determining firms’optimal profits and service rates, we divide the model into three cases. When firms have same proportion of loyal customers but different costs, high cost firm may obtain high profit; when firms have same cost but different proportions of loyal customers, low loyal customer firm may obtain high profit. For gaining maximal profit, the advantageous firm may ask high pricing strategy and give up market share of strategic customers. With benefits of market share from strategic customers, the disadvantageous firm obtains high profit. When firms have both different proportions of loyal customers and costs, we prove that high price may signal low product service rate. Finally, when customers hold different levels of sensitivities of stockouts, we solve firms’optimal pricing strategies in equilibrium.