Investment in customer recognition and information exchange

We investigate how costly acquisition and exchange of customer-specific information affects industry profit and consumer welfare. Consumers differ in their preferences for competing brands and in their switching costs between brands. Brand-producing firms use their acquired knowledge of customer-specific preferences to differentiate prices. We show that consumers are worse off when firms acquire information about their preferences and that information sharing between firms further reduces consumer welfare. Non-sharing of information supports a subgame perfect equilibrium that is also efficient. Finally, equilibrium investments in customer recognition may be excessive if firms bear low costs of acquiring customer-specific information.