  We study how loyalty behavior of customers and differing costs to produce
undifferentiated products by firms can influence market outcomes. In prior
works that study such markets, firm costs have generally been assumed
negligible or equal, and loyalty is modeled as an additive bias in customer
valuations. We extend these previous treatments by explicitly considering cost
asymmetry and richer customer loyalty behavior in a game-theoretic model. Thus,
in the setting where firms incur different non-negligible product costs, and
customers have firm-specific loyalty levels, we comprehensively characterize
the effects of loyalty and product cost difference on market outcomes such as
prices, market shares, and profits. Our analysis and numerical simulations
provide new insights into how firms can price, how they can survive competition
even with higher product costs, and how they can control these costs and/or
increase customer loyalty to change their market position.
