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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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    File URL: http://gsbapps.stanford.edu/researchpapers/library/RP1941(R).pdf
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    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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