Moral Hazard and Customer Loyalty Programs
AbstractFrequent-flier plans (FFPs) may be the most famous of customer loyalty programs, and there are similar schemes in other industries. We present a theory that models FFPs as efforts to exploit the agency relationship between employers (who pay for tickets) and employees (who book travel). FFPs "bribe" employees to book flights at higher prices. While a single airline offering an FFP has an advantage, competing FFPs can result in lower profits for airlines even while ticket prices rise. Thus, in contrast to switching-cost treatments of FFPs, we may observe prices and profits moving in opposite directions. (JEL D82, L93, M31)
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Journal: Microeconomics.
Volume (Year): 1 (2009)
Issue (Month): 1 (February)
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L93 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Air Transportation
- M31 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - Marketing
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
- Caminal, Ramon, 2009.
"The design and efficiency of loyalty rewards,"
CEPR Discussion Papers
7588, C.E.P.R. Discussion Papers.
- de Boer, Evert R. & Gudmundsson, Sveinn Vidar, 2012. "30 years of frequent flyer programs," Journal of Air Transport Management, Elsevier, vol. 24(C), pages 18-24.
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