Customer Loyalty and Multi-stop Shopping

In this paper, we study how customer loyalty impinges on the existence of a multi-stop shopping equilibrium through its effects on the price-setting behaviors of firms. A particular focus lies on the incentive of firms when they operate in two distinct modes of retail, the department store and the shopping mall, relying on whether the individual retailers in the firm are allowed to set their prices independently or not. We show that there exists a multi-stop shopping equilibrium in which customers visit another store although paying a higher price. More importantly, the minimum level of customer loyalty for such an equilibrium goes beyond the level that induces customers to do multi-stop shopping. We argue that this gap is required to discourage the individual retailer, being tempted to raise the price independently in the shopping mall, knowing that the loyal customers do not readily leave her. In light of the existing literature, these results provide a new understanding of multi-stop shopping: (i) multi-stop shopping customers are not motivated entirely by the incentive to search for the lowest available price; (ii) the incentive of firms under different modes of retail is crucial in the existence of multi-stop shopping.