IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

The Economic Viability of Frequency Reward Programs in a Strategic Competitive Environment

  • Kopalle Praveen K

    ()

    (Tuck School of Business, Dartmouth College)

  • Neslin Scott A

    ()

    (Tuck School of Business, Dartmouth College)

Registered author(s):

    We examine the conditions that enhance the economic viability of frequency reward programs in a strategic competitive environment. We focus particularly on conditions related to consumer behavior, namely the extent to which consumers value the future benefits offered by the reward, the expandability of the category, and consumers’ preferences for competing brands. Consumers maximize utility over a long-term time horizon, taking into account the value of the reward. Two firms maximize profits over a long-term time horizon. They first decide between implementing a frequency reward program or a traditional pricing policy (a constant price), and then decide on the specific prices. We numerically solve for the sub-game perfect equilibrium for this two-stage game. We find that a brand is more likely to find reward programs to be viable strategies if consumers value future benefits, if reward programs can expand the market, and if the brand has a higher preference. The market expandability finding is particularly interesting. If the sales increases generated by reward programs represent category growth, the power of frequency reward programs makes them an effective vehicle for generating profits. However, if gains come mainly from competitors, the power of frequency reward programs precipitates a strong competitive response that erodes profits in a classic prisoner’s dilemma. We use the airline industry to explore our market expandability finding. We find evidence that the “major” airlines introduced reward programs to counter-act a stronger outside category (new entrants), and in doing so, they expanded their market.

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below under "Related research" whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Article provided by De Gruyter in its journal Review of Marketing Science.

    Volume (Year): 1 (2003)
    Issue (Month): 1 (August)
    Pages: 1-41

    as
    in new window

    Handle: RePEc:bpj:revmkt:v:1:y:2003:i:1:p:1-41:n:3
    Contact details of provider: Web page: http://www.degruyter.com

    Order Information: Web: http://www.degruyter.com/view/j/roms

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:bpj:revmkt:v:1:y:2003:i:1:p:1-41:n:3. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.