Customer Poaching and Brand Switching

Firms sometimes try to “poach” the current customers of their competitors by offering them special inducements to switch. We analyze duopoly poaching under both short-term and long-term contracts in two polar cases: either each consumer’s brand preferences are constant from one period to the next, or preferences are independent over time. With fixed preferences, poaching induces socially inefficient switching, so welfare is highest when this form of price discrimination is banned; the equilibrium with longterm contracts has less switching than that when only short-term contracts are feasible, so here long-term contracts promote efficiency. With independent preferences, first-period choices do not provide a basis for second-period price discrimination, so the equilibrium with short-term contracts is simply two repetitions of the static equilibrium, and is thus efficient. However, the equilibrium in long-term contracts involves inefficiently little switching.