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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 loyalty-rewarding pricing schemes, like frequent flyer programs, tend to reinforce firms' 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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Suggested Citation

  • 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.
  • Handle: RePEc:eee:indorg:v:25:y:2007:i:4:p:657-674
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    References listed on IDEAS

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    1. Byung-Do Kim & Mengze Shi & Kannan Srinivasan, 2001. "Reward Programs and Tacit Collusion," Marketing Science, INFORMS, vol. 20(2), pages 99-120, June.
    2. 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.
    3. 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, March.
    4. Paul Klemperer, 1995. "Competition when Consumers have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade," Review of Economic Studies, Oxford University Press, vol. 62(4), pages 515-539.
    5. Bruce Kobayashi, 2005. "The Economics of Loyalty Rebates and Antitrust Law in the United States," CPI Journal, Competition Policy International, vol. 1.
    6. Drew Fudenberg & Jean Tirole, 2000. "Customer Poaching and Brand Switching," RAND Journal of Economics, The RAND Corporation, vol. 31(4), pages 634-657, Winter.
    7. 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.
    8. J. Miguel Villas-Boas, 2006. "Dynamic Competition with Experience Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 37-66, March.
    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 807-816, November.
    10. Beggs, Alan W & Klemperer, Paul, 1992. "Multi-period Competition with Switching Costs," Econometrica, Econometric Society, vol. 60(3), pages 651-666, May.
    11. 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.
    12. 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.
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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. Carlo Reggiani, 2014. "Spatial Price Discrimination in the Spokes Model," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 23(3), pages 628-649, September.
    3. Brokesova, Zuzana & Deck, Cary & Peliova, Jana, 2014. "Experimenting with purchase history based price discrimination," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 229-237.
    4. Zuzana Brokesova & Cary Deck & Jana Peliova, 2014. "Experimenting with Behavior Based Pricing," Working Papers 14-12, Chapman University, Economic Science Institute.
    5. 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.
    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. Foschi, Matteo, 2017. "Self-Control in the Retailing Industry: Inducing Rejection of Loyalty Schemes," CRETA Online Discussion Paper Series 37, Centre for Research in Economic Theory and its Applications CRETA.
    8. Emilie Dargaud & Carlo Reggiani, 2015. "On The Price Effects Of Horizontal Mergers: A Theoretical Interpretation," Bulletin of Economic Research, Wiley Blackwell, vol. 67(3), pages 236-255, July.
    9. Andrea Mantovani & Claudio Piga & Carlo Reggiani, 2017. "The dynamics of online hotel prices and the EU Booking.com case," Working Papers 17-04, NET Institute.
    10. Rhee, Ki-Eun, 2014. "What types of switching costs to create under behavior-based price discrimination?," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 209-221.
    11. Yongmin Chen & Jason Pearcy, 2010. "Dynamic pricing: when to entice brand switching and when to reward consumer loyalty," RAND Journal of Economics, RAND Corporation, vol. 41(4), pages 674-685.
    12. Emilie Dargaud & Carlo Reggiani, "undated". "Horizontal Mergers in the Spokes Model," Discussion Papers 09/12, Department of Economics, University of York.
    13. repec:ebl:ecbull:v:12:y:2008:i:26:p:1-8 is not listed on IDEAS
    14. Ramon Caminal, 2009. "The design and efficiency of loyalty rewards," Working Papers 408, Barcelona Graduate School of Economics.
    15. Carlo Reggiani, "undated". "Optimal Differentiation and Spatial Competition: The Spokes Model with Product Delivery," Discussion Papers 09/13, Department of Economics, University of York.
    16. Kakuya Matsushima & Kiyoshi Kobayashi, 2012. "Economic Evaluation of Pre- and Post-Discounting Fee Systems," Chapters,in: The Regional Economics of Knowledge and Talent, chapter 10 Edward Elgar Publishing.

    More about this item

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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