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The design and efficiency of loyalty rewards

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  • Ramon Caminal

Abstract

The goal of this paper is to reexamine the optimal design and efficiency of loyalty rewards in markets for final consumption goods. While the literature has emphasized the role of loyalty rewards as endogenous switching costs (which distort the efficient allocation of consumers), in this paper l analyze the ability of alternative designs to foster consumer participation and increase total surplus. First, the efficiency of loyalty rewards depend on their speci…c design. A commitment to the price of repeat purchases can involve substantial efficiency gains by reducing price-cost margins. However, discount policies imply higher future regular prices and are likely to reduce total surplus. Second, …firms may prefer to set up inefficient rewards (discounts), especially in those circumstances where a commitment to the price of repeat purchases triggers Coasian dynamics.

Suggested Citation

  • Ramon Caminal, 2009. "The design and efficiency of loyalty rewards," Working Papers 408, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:408
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    References listed on IDEAS

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    1. Wesley Hartmann & V. Viard, 2008. "Do frequency reward programs create switching costs? A dynamic structural analysis of demand in a reward program," Quantitative Marketing and Economics (QME), Springer, vol. 6(2), pages 109-137, 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. Byung-Do Kim & Mengze Shi & Kannan Srinivasan, 2001. "Reward Programs and Tacit Collusion," Marketing Science, INFORMS, vol. 20(2), pages 99-120, June.
    4. 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.
    5. Kopalle Praveen K & Neslin Scott A, 2003. "The Economic Viability of Frequency Reward Programs in a Strategic Competitive Environment," Review of Marketing Science, De Gruyter, vol. 1(1), pages 1-41, August.
    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. Mara Lederman, 2008. "Are Frequent-Flyer Programs a Cause of the "Hub Premium"?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 17(1), pages 35-66, March.
    8. 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.
    9. 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.
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    More about this item

    Keywords

    Loyalty rewards; Coasian dynamics; price commitment; coupons;

    JEL classification:

    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L12 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Monopoly; Monopolization Strategies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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