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Strategic Consumers, Revenue Management, and the Design of Loyalty Programs

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  • So Yeon Chun

    (McDonough School of Business, Georgetown University, Washington, District of Columbia 20057)

  • Anton Ovchinnikov

    (Smith School of Business, Queen’s University, Kingston, Ontario K7L 3N6, Canada; INSEAD, 77305 Fontainebleau, France)

Abstract

We study the interaction between the design of a premium-status loyalty program, revenue management, and strategic consumer behavior. Specifically, we consider a contemporaneous change where firms across several industries switch their loyalty programs from quantity-based toward spending-based designs. This change has been met with fierce opposition from the media and consumers. Building on the microfoundations of strategic, forward-looking, and status-seeking consumer behavior, we endogenize strategic consumer response to firms’ pricing and loyalty program design decisions, and we characterize conditions under which, by coordinating these decisions, firms can benefit from strategic consumer behavior. We further show that by switching to a spending-based design, firms can benefit from strategic behavior even more, under broader conditions, and in a Pareto-improving way. Finally, we also analyze combined designs, which utilize a combination of quantity and/or spending requirements, and show how they can be used to better manage the transition toward spending-based designs, possibly minimizing negative consumer reactions.

Suggested Citation

  • So Yeon Chun & Anton Ovchinnikov, 2019. "Strategic Consumers, Revenue Management, and the Design of Loyalty Programs," Management Science, INFORMS, vol. 65(9), pages 3969-3987, September.
  • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:9:p:3969-3987
    DOI: 10.1287/mnsc.2018.3139
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    Cited by:

    1. 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.
    2. 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.
    3. Gu, Wei & Luan, Xiaoting & Song, Yanan & Shang, Jennifer, 2022. "Impact of loyalty program investment on firm performance: Seasonal products with strategic customers," European Journal of Operational Research, Elsevier, vol. 299(2), pages 621-630.
    4. 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.
    5. Valeria Stourm & Scott A. Neslin & Eric T. Bradlow & Els Breugelmans & So Yeon Chun & Pedro Gardete & P. K. Kannan & Praveen Kopalle & Young-Hoon Park & David Restrepo Amariles & Raphael Thomadsen & Y, 2020. "Refocusing loyalty programs in the era of big data: a societal lens paradigm," Marketing Letters, Springer, vol. 31(4), pages 405-418, December.

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