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Sticky Rebates: Rollback Rebates Induce Non-Rational Loyalty in Consumers

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  • Alexander Morell

    ()
    (Max Planck Institute for Research on Collective Goods)

  • Andreas Glöckner

    ()
    (Max Planck Institute for Research on Collective Goods)

  • Emanuel Towfigh

    ()
    (Max Planck Institute for Research on Collective Goods)

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    Abstract

    Competition policy often relies on the assumption of a rational consumer, although other models may better account for people’s decision behavior. In three experiments, we investigate the influence of loyalty rebates on consumers based on the alternative Cumulative Prospect Theory (CPT), both theoretically and experimentally. CPT predicts that loyalty rebates could harm consumers by impeding rational switching from an incumbent to an outside option (e.g., a market entrant). In a repeated trading task, participants decided whether or not to enter a loyalty rebate scheme and to continue buying within that scheme. Meeting the condition triggering the rebate was uncertain. Loyalty rebates considerably reduced the likelihood that participants switched to a higher-payoff outside option later. We conclude that loyalty rebates may inflict substantial harm on consumers and may have an underestimated potential to foreclose consumer markets.

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    Bibliographic Info

    Paper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2009_23.

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    Date of creation: Aug 2009
    Date of revision: Feb 2013
    Handle: RePEc:mpg:wpaper:2009_23

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