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Are loyalty-rewarding pricing schemes anti-competitive?

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  • Ramón Caminal
  • Adina Claici

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

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 228.

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Date of creation: Nov 2005
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Handle: RePEc:bge:wpaper:228

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Keywords: repeat purchases; switching costs; price commitment; coupons;

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References

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  1. Yongmin Chen & Michael H. Riordan, 2007. "Vertical integration, exclusive dealing, and expost cartelization," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 1-21, 03.
  2. Drew Fudenberg & Jean Tirole, 1999. "Customer Poaching and Brand Switching," Harvard Institute of Economic Research Working Papers 1871, Harvard - Institute of Economic Research.
  3. Caminal, Ramon & Claici, Adina, 2007. "Are loyalty-rewarding pricing schemes anti-competitive?," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 657-674, August.
  4. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-66, May.
  5. 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.
  6. Byung-Do Kim & Mengze Shi & Kannan Srinivasan, 2001. "Reward Programs and Tacit Collusion," Marketing Science, INFORMS, vol. 20(2), pages 99-120, June.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. J. Miguel Villas-Boas, 2006. "Dynamic Competition with Experience Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 37-66, 03.
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Cited by:
  1. repec:ebl:ecbull:v:12:y:2008:i:26:p:1-8 is not listed on IDEAS
  2. 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.
  3. Caminal, Ramon & Claici, Adina, 2007. "Are loyalty-rewarding pricing schemes anti-competitive?," International Journal of Industrial Organization, Elsevier, vol. 25(4), pages 657-674, August.
  4. Carlo Reggiani, 2012. "Spatial price discrimination in the spokes model," The School of Economics Discussion Paper Series 1207, Economics, The University of Manchester.
  5. Ramon Caminal, 2009. "The design and efficiency of loyalty rewards," UFAE and IAE Working Papers 789.09, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  6. Ramon Caminal, 2009. "The design and efficiency of loyalty rewards," Working Papers 408, Barcelona Graduate School of Economics.
  7. Zuzana Brokesova & Cary Deck & Jana Peliova, 2014. "Experimenting with Behavior Based Pricing," Working Papers 14-12, Chapman University, Economic Science Institute.
  8. 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.

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