Strategic Investment in Switching Cost: An Integrated Customer Acquisition and Retention Perspective

Ling Xue, Gautam Ray, and Andrew B. Whinston
International Journal of Electronic Commerce,
Volume 11, Number 1, Fall 2006, pp. 7.

Abstract: This paper considers the interaction between investment to increase Web site stickiness (consumer switching costs) and competition. A duopoly model is used to examine investment by a superior firm to increase consumer switching costs and competition for customer acquisition and customer retention between the investing firm and a non-investing firm. Gaining a competitive advantage in customer retention is the purpose of strategic technology investment, but the model shows that where consumers are myopic about the benefits they will derive from the technology investment, aggressive price competition by a non-investing firm can prevent the investing firm from acquiring a larger market share and consequently reduce its incentive to invest. However, an investing firm that can persuade consumers of the benefits of the technology investment will have an advantage in customer acquisition and thus may have an incentive to invest.

Key Words and Phrases: Customer acquisition, customer retention, game theory, IT investment, switching cost, Web site stickiness.