Customer Loyalty and Supplier Quality Competition

We develop a model of customer choice in response to random variation in quality. The choice model yields closed-form expressions which reflect the effect of competing suppliers’ service quality on the long-run fraction of purchases a customer makes at the various competitors. We then use the expressions as the basis of simple normative models for suppliers seeking to maximize their long-run average profits. The results provide insight into the effect of switching behavior on the service levels offered by competing suppliers.