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Abstract

Price discounts generally move consumers from lower-quality brands to higher-quality brands more than from higher-quality brands to lower-quality brands. This asymmetry can reverse, however, to favor the lower-quality brand when improvements are made to product quality. Whether such variations exist when the goal is to retain rather than steal customers remains untested and constitutes the focus of this study. Experimental results indicate that customer retention strategies tend to favor higher-quality brands. Higherquality brands are able to retain customers by matching the form of the lower-quality brand's attack (price reduction or quality improvement). For lower-quality brands, matching is effective only in the case of a price attack by a higher-quality brand. Furthermore, higher-quality brands are able to effectively retain customers with price reductions that are smaller than the discount offered by a lower-quality competitor, whereas lower-quality brands must match the magnitude of a discount by a higher-quality brand to retain customers. The findings suggest that differences in customer retention across quality levels arise from (1) heterogeneity among consumers of different quality levels in the relative weightings of price and quality, and (2) switching decisions based on reasons that are biased toward continuing to purchase, or moving to, higher quality products. © 2008 Wiley Periodicals, Inc.