Brand Loyalty and Market Equilibrium

Two concepts of brand loyalty are defined, “inertial” brand loyalty resulting from time lags in awareness, and “cost-based” brand loyalty resulting from intertemporal utility effects. Their market level implications are formally derived in a continuous time model. It is found that inertial brand loyalty leads to equilibria with price dispersion, while cost-based brand loyalty also may allow single price equilibria. In all cases, as brand loyalty vanishes, so does the difference between the average trading price and the price which obtains with no brand loyalty. Consistent with empirical results, the theory predicts that the relationship between market share and performance is positive in cross-sectional studies, but flat in time-series studies. The theory is also consistent with the view that market share is an asset in itself. After developing the theory, several strategic implications are drawn. In the end, some questions for further theoretical and empirical research are raised.