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Managing Capacity Through Reward Programs

Author

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  • Byung-Do Kim

    (College of Business Administration, Seoul National University, 56-1 Shinlim-dong, Kwanak-ku, Seoul, 151-742, Korea)

  • Mengze Shi

    (Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6 Canada)

  • Kannan Srinivasan

    (Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

Abstract

Rewarding customers with own products or services has become an increasingly popular practice across a spectrum of industries such as airlines, hotels, and telecommunication. In these service industries, firms face demand uncertainty and strict short-term capacity constraint. When the market demand is low, firms hold excess capacities that would lead to intense price competition. In this paper we study the adoption and design of reward programs in the context of capacity management. We demonstrate that it is optimal for firms to offer capacity rewards when the market demand varies from one period to the other. By offering the reward programs, firms can effectively reduce available capacities when the market demand is low, and hence credibly show their unwillingness to undersell. Such a commitment can encourage their competitors to set their prices high. When firms provide reward programs, if a firm sets a higher price than the other and sells less today, in the future the firm can benefit from the other firm's larger reduction in available capacity through rewards. Thus, reward programs also provide additional incentives for firms to set higher current prices. Finally, since reward programs can add flexibility in adjusting the available capacities to the market demand, firms increase the size of regular capacities with reward programs.

Suggested Citation

  • Byung-Do Kim & Mengze Shi & Kannan Srinivasan, 2004. "Managing Capacity Through Reward Programs," Management Science, INFORMS, vol. 50(4), pages 503-520, April.
    • Handle: RePEc:inm:ormnsc:v:50:y:2004:i:4:p:503-520
    DOI: 10.1287/mnsc.1030.0175
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    References listed on IDEAS

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    Cited by:

    1. Yang, Hai & Shao, Chaoyi & Wang, Hai & Ye, Jieping, 2020. "Integrated reward scheme and surge pricing in a ridesourcing market," Transportation Research Part B: Methodological, Elsevier, vol. 134(C), pages 126-142.
    2. Tang, Wei & Xie, Ningke & Mo, Dong & Cai, Zeen & Lee, Der-Horng & Chen, Xiqun (Michael), 2023. "Optimizing subsidy strategies of the ride-sourcing platform under government regulation," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 173(C).
    3. Chen, Yanyan & Mandler, Timo & Meyer-Waarden, Lars, 2021. "Three decades of research on loyalty programs: A literature review and future research agenda," Journal of Business Research, Elsevier, vol. 124(C), pages 179-197.
    4. Yacheng Sun & Dan Zhang, 2019. "A Model of Customer Reward Programs with Finite Expiration Terms," Management Science, INFORMS, vol. 65(8), pages 3889-3903, August.
    5. Lin, Chen & Bowman, Douglas, 2022. "The impact of introducing a customer loyalty program on category sales and profitability," Journal of Retailing and Consumer Services, Elsevier, vol. 64(C).
    6. Liang Guo, 2023. "Overage Charge or Loyalty Discount: When Should Extra Consumptions Be Penalized or Rewarded?," Marketing Science, INFORMS, vol. 42(3), pages 614-633, May.
    7. Wang, Hai & Yang, Hai, 2019. "Ridesourcing systems: A framework and review," Transportation Research Part B: Methodological, Elsevier, vol. 129(C), pages 122-155.
    8. Yinliang (Ricky) Tan & Yan Xiong & Haibing Gao & Xi Li & Huazhong Zhao, 2021. "Less is More? The Strategic Role of Retailer's Capacity," Production and Operations Management, Production and Operations Management Society, vol. 30(10), pages 3354-3368, October.
    9. So Yeon Chun & Dan A. Iancu & Nikolaos Trichakis, 2020. "Loyalty Program Liabilities and Point Values," Manufacturing & Service Operations Management, INFORMS, vol. 22(2), pages 257-272, March.
    10. Gandomi, Amir & Zolfaghari, Saeed, 2018. "To tier or not to tier: An analysis of multitier loyalty programs׳ optimality conditions," Omega, Elsevier, vol. 74(C), pages 20-36.
    11. Guo, Xingchen & Jiang, Changmin & Jiang, Siming & Guo, Huanxiu, 2023. "Making airline coalition frequent-flyer programs profitable: An analytical investigation," Transport Policy, Elsevier, vol. 141(C), pages 245-262.
    12. Gandomi, A. & Zolfaghari, S., 2013. "Profitability of loyalty reward programs: An analytical investigation," Omega, Elsevier, vol. 41(4), pages 797-807.
    13. Amr Farahat & Woonghee Tim Huh & Hongmin Li, 2019. "On the Relationship Between Quantity Precommitment and Cournot Games," Operations Research, INFORMS, vol. 67(1), pages 109-122, January.
    14. Bing Jing, 2016. "Customer Recognition in Experience vs. Inspection Good Markets," Management Science, INFORMS, vol. 62(1), pages 216-224, January.
    15. Rajiv Lal & David Bell, 2003. "The Impact of Frequent Shopper Programs in Grocery Retailing," Quantitative Marketing and Economics (QME), Springer, vol. 1(2), pages 179-202, June.
    16. Aaron Luntala Nsakanda & Moustapha Diaby & Yuheng Cao, 2011. "An aggregate inventory-based model for predicting redemption and liability in loyalty reward programs industry," Information Systems Frontiers, Springer, vol. 13(5), pages 707-719, November.
    17. Anja Lambrecht & Katja Seim & Bernd Skiera, 2007. "Does Uncertainty Matter? Consumer Behavior Under Three-Part Tariffs," Marketing Science, INFORMS, vol. 26(5), pages 698-710, 09-10.
    18. Emil Temnyalov, 2019. "Points mechanisms and rewards programs," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 28(3), pages 436-457, June.

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