Consider a market for a homogeneous good, such as a
specific book or music CD, sold by three retailers. On the
demand side, each customer purchases a single unit of the
good if it is offered at or below the reservation price r,
which is assumed to be homogeneous for all customers and across all retailers.3 We model different segments of both
loyal customers who buy from their preferred retailer as
long as the price does not exceed r and switchers who comparison
shop. The loyal customers are faithful to only one
firm; the number of customers who are loyal to Firm i is ni.
Without loss of generality, we assume that n1 > n2 > n3. We
also assume the existence of two switcher segment sizes,
s123 and s12, whose members are not loyal to any firm but
rather buy from the lowest-priced retailer among those they
compare. Switcher segment s123 is fully informed, meaning
that its members compare prices quoted by all three firms.
Switcher segment s12 compares prices quoted only by the
larger Firms 1 and 2. Although these partially informed
switchers do not compare all retailer prices, they still compare
the prices from the best-recognized retailers, which
may have the largest reach and the most active communication
channels.4 Firms 1 and 2 would be like B&N and
Amazon.com (the biggest online booksellers), whereas
Firm 3 would be like a1Books. Although some switchers
will compare prices at all three retailers (s123), a1Books has
less than 1% of B&N’s reach, so there are likely to be other
switchers who are unfamiliar with a1Books and compare
only Amazon.com and B&N (s12)