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Moral Hazard and Customer Loyalty Programs

Author

Listed:
  • Leonardo J. Basso
  • Matthew T. Clements
  • Thomas W. Ross

Abstract

Frequent-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)

Suggested Citation

  • Leonardo J. Basso & Matthew T. Clements & Thomas W. Ross, 2009. "Moral Hazard and Customer Loyalty Programs," American Economic Journal: Microeconomics, American Economic Association, vol. 1(1), pages 101-123, February.
  • Handle: RePEc:aea:aejmic:v:1:y:2009:i:1:p:101-23
    Note: DOI: 10.1257/mic.1.1.101
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    References listed on IDEAS

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    1. Armstrong, Mark & Vickers, John, 2001. "Competitive Price Discrimination," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 579-605, Winter.
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    Citations

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    Cited by:

    1. Ramon Caminal, 2012. "The Design and Efficiency of Loyalty Rewards," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 21(2), pages 339-371, June.
    2. Els Breugelmans & Tammo Bijmolt & Jie Zhang & Leonardo Basso & Matilda Dorotic & Praveen Kopalle & Alec Minnema & Willem Mijnlieff & Nancy Wünderlich, 2015. "Advancing research on loyalty programs: a future research agenda," Marketing Letters, Springer, vol. 26(2), pages 127-139, June.
    3. Christiaan Behrens & Nathalie McCaughey, 2015. "Loyalty Programs and Consumer Behaviour: The Impact of FFPs on Consumer Surplus," Tinbergen Institute Discussion Papers 15-048/VIII, Tinbergen Institute.
    4. Nesset, Erik & Helgesen, Øyvind, 2014. "Effects of switching costs on customer attitude loyalty to an airport in a multi-airport region," Transportation Research Part A: Policy and Practice, Elsevier, vol. 67(C), pages 240-253.
    5. Agostini, Claudio A. & Inostroza, Diego & Willington, Manuel, 2015. "Price effects of airlines frequent flyer programs: The case of the dominant firm in Chile," Transportation Research Part A: Policy and Practice, Elsevier, vol. 78(C), pages 283-297.
    6. Laurent Callot & Johannes Tang Kristensen, 2014. "Vector Autoregressions with Parsimoniously Time Varying Parameters and an Application to Monetary Policy," CREATES Research Papers 2014-41, Department of Economics and Business Economics, Aarhus University.
    7. 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.

    More about this item

    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; Personnel Economics - - Marketing and Advertising - - - Marketing

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