The design and efficiency of loyalty rewards
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 I analyze the ability of alternative designs to foster consumer participation and increase total surplus. First, the efficiency of loyalty rewards depend on their specific 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 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.
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- 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.
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- Leonardo J. Basso & Matthew T. Clements & Thomas W. Ross, 2009. "Moral Hazard and Customer Loyalty Programs," American Economic Journal: Microeconomics, American Economic Association, vol. 1(1), pages 101-123, February.
- 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.
- 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, 03.
- 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.
- 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. Full references (including those not matched with items on IDEAS)
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