Abstract: This paper uses a stylized duopoly model to study the competitive effects of Behavior-Based Servicing (BBS), a common practice that rewards loyal customers with service priority. BBS entails dual externalities: improved service quality to high-priority customers (positive externality) leads to reduced service quality to low-priority customers (negative externality), and vice versa. When both firms adopt BBS, their customers may pay a status premium above their natural product valuation in anticipation of future value from the positive externality. Both firms gain profits in such a status-seeking equilibrium. However, consumers can become apathetic to BBS in a market with a strong negative externality for low-priority customers; in such an equilibrium, loyal customers do not benefit from their high-priority status. When competing firms pursue opposite BBS strategies, the firm which does not use BBS can earn a higher profit than its competitor because new customers will experience the negative externality only from the firm that uses BBS. These results underscore the importance of examining both sides of externalities engendered by BBS.