SEQUENTIAL ENTRY WITH BRAND LOYALTY CAUSED BY CONSUMER LEARNING-BY-USING

We examine first mover advantages in a new product market with sequential entry. Effort is necessary to learn how to use new products, and consumers are assumed to differ in their ability to expend such effort. We consider the intertemporal pricing strategy of the first entrant who anticipates the late entry of a rival firm. The first entrant's optimal strategy is to set a low introductory price. This builds up a customer base, which remains loyal despite the later entry of a lower-priced rival, and weakens price competition between the two firms. Thus, brand loyalty makes entry into the market easier.