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Are loyalty-rewarding pricing schemes anti-competitive?

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  • Caminal, Ramon
  • Claici, Adina

Abstract

Many economists and policy analysts seem to believe that loyaltyrewarding pricing schemes, like frequent flyer programs, tend to reinforce firm's market power and hence are detrimental to consumer welfare. The existing academic literature has supported this view to some extent. In contrast, we argue that these programs are business stealing devices that enhance competition, in the sense of generating lower average transaction prices and higher consumer surplus. This result is robust to alternative specifications of the firms' commitment power and demand structures, and is derived in a theoretical model whose main predictions are compatible with the sparse empirical evidence.

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Bibliographic Info

Article provided by Elsevier in its journal International Journal of Industrial Organization.

Volume (Year): 25 (2007)
Issue (Month): 4 (August)
Pages: 657-674

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Handle: RePEc:eee:indorg:v:25:y:2007:i:4:p:657-674

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Web page: http://www.elsevier.com/locate/inca/505551

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References

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  1. Bulkley, George, 1992. "The role of loyalty discounts when consumers are uncertain of the value of repeat purchases," International Journal of Industrial Organization, Elsevier, vol. 10(1), pages 91-101, March.
  2. Joshua S. Gans & Stephen P. King, 2006. "PAYING FOR LOYALTY: PRODUCT BUNDLING IN OLIGOPOLY -super-* ," Journal of Industrial Economics, Wiley Blackwell, vol. 54(1), pages 43-62, 03.
  3. J. Miguel Villas-Boas, 2006. "Dynamic Competition with Experience Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 37-66, 03.
  4. Klemperer, Paul, 1995. "Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 515-39, October.
  5. Robert D. Cairns & John W. Galbraith, 1990. "Artificial Compatibility, Barriers to Entry, and Frequent-Flyer Programs," Canadian Journal of Economics, Canadian Economics Association, vol. 23(4), pages 807-16, November.
  6. To, Theodore, 1996. "Multi-period Competition with Switching Costs: An Overlapping Generations Formulation," Journal of Industrial Economics, Wiley Blackwell, vol. 44(1), pages 81-87, March.
  7. Ramón Caminal & Adina Claici, 2005. "Are loyalty-rewarding pricing schemes anti-competitive?," Working Papers 228, Barcelona Graduate School of Economics.
  8. Drew Fudenberg & Jean Tirole, 1999. "Customer Poaching and Brand Switching," Harvard Institute of Economic Research Working Papers 1871, Harvard - Institute of Economic Research.
  9. Caminal, Ramon & Matutes, Carmen, 1990. "Endogenous switching costs in a duopoly model," International Journal of Industrial Organization, Elsevier, vol. 8(3), pages 353-373, September.
  10. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-66, May.
  11. Yongmin Chen & Michael H. Riordan, 2003. "Vertical Integration, Exclusive Dealing, and Ex Post Cartelization," Discussion Papers 0203-13, Columbia University, Department of Economics.
  12. Byung-Do Kim & Mengze Shi & Kannan Srinivasan, 2001. "Reward Programs and Tacit Collusion," Marketing Science, INFORMS, vol. 20(2), pages 99-120, June.
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Cited by:
  1. Zuzana Brokesova & Cary Deck & Jana Peliova, 2014. "Experimenting with Behavior Based Pricing," Working Papers 14-12, Chapman University, Economic Science Institute.
  2. Ramon Caminal, 2009. "The design and efficiency of loyalty rewards," Working Papers 408, Barcelona Graduate School of Economics.
  3. Emilie Dargaud & Carlo Reggiani, 2012. "On the Price Effects of Horizontal Mergers: A Theoretical Interpretation," The School of Economics Discussion Paper Series 1201, Economics, The University of Manchester.
  4. Caminal, Ramon, 2009. "The design and efficiency of loyalty rewards," CEPR Discussion Papers 7588, C.E.P.R. Discussion Papers.
  5. Carlo Reggiani, 2012. "Spatial price discrimination in the spokes model," The School of Economics Discussion Paper Series 1207, Economics, The University of Manchester.
  6. Greenlee, Patrick & Reitman, David & Sibley, David S., 2008. "An antitrust analysis of bundled loyalty discounts," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1132-1152, September.
  7. repec:ebl:ecbull:v:12:y:2008:i:26:p:1-8 is not listed on IDEAS
  8. Caminal, Ramón & Claici, Adina, 2005. "Are loyalty-rewarding pricing schemes anti-competitive?," CEPR Discussion Papers 5353, C.E.P.R. Discussion Papers.

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