Abstract: The interaction between a firm and consumers is studied that is consisted with some loyal customers who are not sensitive to the firm’s cost types and some general customers are the opposite. The firm can be either high cost type or low, however, the consumers cannot observe the firm’s exact type, which is private information. The high type firm can signal its type through pricing and quality strategy. It is found that under the symmetric information, increasing proportion of loyal customers makes both type firms better off; under the asymmetric information, the low cost type firm can still benefit from an increasing proportion of loyal customers,whereas, the high cost type firm may be worse off. In addition, the high cost type firm will be more intend to separating rather than pooling with the increasing proportion of loyal customers. Finally, when the proportion of loyal customers is higher than a threshold, the positive effect of price distortion is greater than the negative effects of loyal customers.

Key words: customer loyalty; signaling; asymmetric information