2021
Working Paper
HBS Working Paper Series

Dynamic Competition for Customer Memberships

By: Cristian Chica and Jorge Tamayo

Format:Print
| Language:English
| Pages:77

Abstract

A competitive two-period membership (subscription) market is analyzed. Two symmetric firms charge a “membership” fee that allows consumers to buy products or services at a given unit price for both periods. Firms can choose between long- or short-term memberships. When firms employ long-term membership, they have incentives to prevent their old customers from being poached by competitors, and to price-discriminate with their membership fee and unit price regarding customer purchase behavior. In contrast, with short-term membership, they do not discriminate between new and old customers with their unit price but only with their membership fees. Overall, the number of consumers poached is smaller with long-term memberships, but the equilibrium profits are higher when firms offer short-term memberships. Moreover, short-term membership is a Nash equilibrium.