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Artificial Compatibility, Barriers to Entry, and Frequent-Flyer Programs

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  • Robert D. Cairns
  • John W. Galbraith

Abstract

If supplier firms can discriminate between buyers (agents) acting on behalf of employers (principals) and those making purchases for themselves, then these firms may be able to create demand-side entry barriers by creating what may be called "artificial compatibility" between otherwise unrelated goods or services. Even if there are no differences in costs between incumbent and potential entrant, there will be an incentive to offer in-kind inducements to agents; these inducements may lead to entry barriers, and their use may be a Nash equilibrium. We argue that "frequent-flyer" programs are instances of the creation of such artificial compatibility.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 23 (1990)
Issue (Month): 4 (November)
Pages: 807-16

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Handle: RePEc:cje:issued:v:23:y:1990:i:4:p:807-16

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Cited by:
  1. Austan Goolsbee & Chad Syverson, 2005. "How do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines," NBER Working Papers 11072, National Bureau of Economic Research, Inc.
  2. Huric Larsen, Jesper Fredborg, 2012. "Pricing behaviour at capacity constrained facilities," MPRA Paper 39362, University Library of Munich, Germany.
  3. Ramón Caminal & Adina Claici, 2005. "Are loyalty-rewarding pricing schemes anti-competitive?," Working Papers 228, Barcelona Graduate School of Economics.
  4. Fredrik Carlsson & �sa Lofgren, 2006. "Airline choice, switching costs and frequent flyer programmes," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 38(13), pages 1469-1475.
  5. Wesley Hartmann & V. Viard, 2008. "Do frequency reward programs create switching costs? A dynamic structural analysis of demand in a reward program," Quantitative Marketing and Economics, Springer, Springer, vol. 6(2), pages 109-137, June.
  6. Claudio Agostini, 2005. "El Mercado de Transporte Aéreo: Lecciones para Chile de una Revisión de la Literatura," ILADES-Georgetown University Working Papers, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines inv163, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.

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