How to Exploit a Market Niche by Responsivity?

When people purchase goods or services, their experiences can meet, exceed, or fall short of their expectations. This process of convergence creates a diverse market, where some customer's expectations naturally align with the provided quality. The customers whose expectations converge to the quality offered are more likely to remain loyal to the firm in the long run. The customers whose beliefs diverge face a sequence of satisfying and dissatisfying experiences, which makes them likely to resign from using the product. This convergence can be facilitated by the firm's responsivity, which is costly. In this paper, we explore how responsivity can present an opportunity for a new market entrant to attract potentially loyal customers in order to deploy a niche left by a first-mover without causing costly competition. Responsivity acts as a niche marketing strategy, and we find how to use it in the optimal way.