Customer Recognition Beyond Prices:
Service Priority in Congested Markets
Customer recognition can make both firms and consumers worse off. I develop a model of competition in congested service markets where firms personalize prices and service priority using purchase histories. Congestion reverses conventional predictions of behavior-based price discrimination, while strategic priority choices can generate a coordination failure in which firms adopt service policies that leave both worse off than a coordinated alternative.
Firms increasingly use customer purchase histories to personalize prices and service priority. How does this affect competition and welfare when service is congested? I develop a two-period model in which firms compete for loyal and rival customers through history-dependent prices and service allocation. I show that congestion overturns conventional predictions of behavior-based price discrimination: customer recognition can increase profits while reducing consumer surplus, or make firms and consumers worse off simultaneously, even under history-neutral service. Favoring loyal or poached customers changes switching incentives and equilibrium prices, potentially reversing the conventional ordering of loyalty and poaching prices. When firms choose among loyal-first, poached-first, and history-neutral service, acquisition incentives can sustain poached-first service even though both firms earn higher profits under loyal-first service. When loyal-first service is also an equilibrium, firms face a coordination problem. Under common priority policies and interior outcomes, customer recognition lowers total welfare by inducing inefficient switching without reducing aggregate waiting costs.