The fundamental intuition behind our model is that multiple
switcher segments can lessen price competition among
firms (for a model of price competitiveness in the context of
consumer search costs, see Lal and Sarvary 1999). Firms
with greater motivation to discount, because of a smaller
loyal segment size and/or a greater number of switchers to
potentially serve, will more actively compete for the fully
informed switchers. This leaves firms with fewer relevant
switchers for a given loyalty size to focus on their loyals
and the subset of switchers who consider them in their price
comparison search. In such cases, prices will typically be
higher than they would be if the firm were to compete for
all switchers. Other firms discount less in reaction to these
higher prices, and thus the severity of price competition
becomes less overall. Under some conditions, the firm with
the fewest loyals can be the highest-priced firm, a result that
asymmetric loyalty by itself cannot implement. Our model
predictions reflect a wide variance in retailers’ price dispersions,
consistent with empirical observations.