An Alternative Model of Brand Loyalty

Analytical modeling has traditionally characterized brand loyalty as a friction-based phenomenon driven by switching costs. However, loyalty also emerges from affinity-based preference shifts, where past consumption reshapes a consumer’s underlying tastes. This paper develops a sequential-entry duopoly model to examine the divergent strategic implications of these two mechanisms. We find that although both forms of loyalty lead to high retention, they trigger opposite competitive dynamics. Preference shifts induce enhanced competition that erodes firms’ profits, whereas switching costs create an incumbent-advantage environment with sustained leader dominance. These differences also lead to a different positioning strategy for the follower, with her locating closer to the leader under preference shifts. We demonstrate that although switching costs impose a deadweight loss on social welfare, preference-shift loyalty can improve both consumer surplus and social welfare by reducing misfit costs and prices. These findings suggest that loyalty-building investments in product features and user experience (preference shifts) lead to significantly different market outcomes than investments in lock-in (switching costs), offering key implications for managers, policymakers, and regulators.

History: Juan Feng, Senior Editor; Atanu Lahiri, Associate Editor.

Supplemental Material: The online appendix is available at https://doi.org/10.1287/isre.2022.0278.