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Do Frequency Reward Programs Create Switching Costs? A Dynamic Structural Analysis of Demand in a Reward Program

Author

Listed:
  • Hartmann, Wesley R.

    (Stanford U)

  • Viard, V. Brian

Abstract

This paper examines a common assertion that customers in reward programs become "locked in" as they accumulate credits toward earning a reward. We define a measure of switching costs and use a dynamic structural model of demand in a reward program to illustrate that frequent customers' incentives to purchase are practically invariant to the number of credits. In our empirical example, these customers comprise over eighty percent of all rewards and over two-thirds of all purchases. Less frequent customers may face substantial switching costs when close to a reward, but rarely reach this state.

Suggested Citation

  • Hartmann, Wesley R. & Viard, V. Brian, 2007. "Do Frequency Reward Programs Create Switching Costs? A Dynamic Structural Analysis of Demand in a Reward Program," Research Papers 1941r, Stanford University, Graduate School of Business.
  • Handle: RePEc:ecl:stabus:1941r
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    References listed on IDEAS

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    1. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
    2. Paul Klemperer, 1987. "Markets with Consumer Switching Costs," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 375-394.
    3. Daniel Ackerberg, 2009. "A new use of importance sampling to reduce computational burden in simulation estimation," Quantitative Marketing and Economics (QME), Springer, vol. 7(4), pages 343-376, December.
    4. Borenstein, S., 1993. "Repeat Buyer Programs in Network industries," Papers 93-10, California Davis - Institute of Governmental Affairs.
    5. 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.
    6. Wesley Hartmann, 2006. "Intertemporal effects of consumption and their implications for demand elasticity estimates," Quantitative Marketing and Economics (QME), Springer, vol. 4(4), pages 325-349, December.
    7. 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.
    8. Matthew Shum, 2004. "Does Advertising Overcome Brand Loyalty? Evidence from the Breakfast-Cereals Market," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(2), pages 241-272, June.
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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. Ramon Caminal, 2009. "The design and efficiency of loyalty rewards," Working Papers 408, Barcelona Graduate School of Economics.
    3. David Godes & Dina Mayzlin, 2009. "Firm-Created Word-of-Mouth Communication: Evidence from a Field Test," Marketing Science, INFORMS, vol. 28(4), pages 721-739, 07-08.
    4. Jorge Ale, 2013. "Switching Costs and Introductory Pricing in the Wireless Service Industry," Working Papers 13-17, NET Institute.
    5. Ribeiro, Ricardo, 2010. "Consumer demand for variety: intertemporal effects of consumption, product switching and pricing policies," MPRA Paper 25812, University Library of Munich, Germany.
    6. repec:eee:ijrema:v:31:y:2014:i:4:p:339-355 is not listed on IDEAS
    7. repec:eee:proeco:v:193:y:2017:i:c:p:352-364 is not listed on IDEAS
    8. Chenghuan Sean Chu & Phillip Leslie & Alan Sorensen, 2006. "Nearly Optimal Pricing for Multiproduct Firms," 2006 Meeting Papers 830, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing

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