Captive customer
From Wikipedia, the free encyclopedia
A captive customer is a marketing[1] and regulatory concept,[2] describing a buyer or user that is unable or unwilling to change the provider of goods or services due to high switching costs,[3][4] provider being a natural monopoly,[5][6] or some other circumstances that preclude substitution.[7] This leads to a situation where the provider has the pricing power.[3][8]
In service marketing, the concept extends beyond structural constraints to include the consumer's psychological perception of entrapment, characterized by a "triad": the lack of choice, voice, and power.[4] While firms may view captive customers as a source of stable revenue, research indicates that captivity can lead to negative consumer well-being and retaliatory behaviors such as negative word-of-mouth.[9]
A classic 19th-early 20th century example is a major originator of transit, e.g., a mine or granary located at the end of a railroad spur line, where the carrier could name its own tariffs. Other examples are offered by the suppliers of the natural gas and water (although in the latter case it is possible, at least in theory, drill one's own well).[2] For example, US courts have long held that for the gas industry, a captive customer is the one "who must use gas and can only obtain it from one provider".[10]
From a regulatory standpoint, the producer's pricing power is considered undesirable.[citation needed] Technological and economic changes, like introduction of the long-distance trucking and emergence of airlines helped alleviate some problems with captive customers.[11] Large enterprises, facing the captive customer situation with utilities, can provide their own supplies of electricity and heat (cogeneration facilities), communication networks, natural gas supply deals. However, provision of core services (gas, electricity, basic communications) for residential and small business customers remains an issue and is therefore regulated.[12]
The public utility customers are typically captive. For example, Federal Energy Regulatory Commission explicitly defined captive customers as "wholesale or retail electric energy customers served under cost-based regulation".[13]
Economics
In industrial economics, captive customers are often analyzed in the context of switching costs and price discrimination.
Switching costs
Captivity is frequently generated by switching costs, which render a firm's current market share a critical determinant of future profitability.[3] These costs can be physical (equipment compatibility), transactional (closing accounts), informational (learning new systems), or psychological (brand loyalty).[14] When consumers face high switching costs, firms may engage in a harvesting strategy, charging high prices to exploit their locked-in ("captive") customer base, distinct from the low prices used to attract new "shoppers".[3]
Price discrimination
Firms often possess the ability to distinguish between captive customers (who consider only one seller) and "shoppers" (who compare prices across sellers).[8] Economic models suggest that price discrimination against captive customers—charging them higher prices than shoppers—generally harms overall consumer welfare when competing firms are symmetric (i.e., they have similar shares of captive customers).[8] In this scenario, discrimination widens the variation of profit across consumers, which is harmful if consumer surplus is a concave function of profit.[8] However, in highly asymmetric markets, where one firm dominates, permitting price discrimination can potentially benefit consumers by intensifying competition for the non-captive segment.[8]