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

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  • 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
    as

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    References listed on IDEAS

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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. Andrew T. Ching & Masakazu Ishihara, 2018. "Identification of Dynamic Models of Rewards Programme," The Japanese Economic Review, Springer, vol. 69(3), pages 306-323, September.
    3. Ramon Caminal, 2009. "The design and efficiency of loyalty rewards," Working Papers 408, Barcelona Graduate School of Economics.
    4. Jisu J. Kim & Lena Steinhoff & Robert W. Palmatier, 2021. "An emerging theory of loyalty program dynamics," Journal of the Academy of Marketing Science, Springer, vol. 49(1), pages 71-95, January.
    5. 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.
    6. 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.
    7. Oparinde, Adewale & Birol, Ekin & Murekezi, Abdoul & Katsvairo, Lister & Diressie, Michael & Nkundimana, Jean & Butare, Louis, 2015. "Consumer Acceptance of Biofortified Iron Beans in Rural Rwanda: Experimental Evidence," 2015 Conference, August 9-14, 2015, Milan, Italy 211353, International Association of Agricultural Economists.
    8. Ki-Eun Rhee & Raphael Thomadsen, 2017. "Behavior-Based Pricing in Vertically Differentiated Industries," Management Science, INFORMS, vol. 63(8), pages 2729-2740, August.
    9. Jorge Ale, 2013. "Switching Costs and Introductory Pricing in the Wireless Service Industry," Working Papers 13-17, NET Institute.
    10. Lam, Wing Man Wynne & Liu, Xingyi, 2020. "Does data portability facilitate entry?," International Journal of Industrial Organization, Elsevier, vol. 69(C).
    11. Ribeiro, Ricardo, 2010. "Consumer demand for variety: intertemporal effects of consumption, product switching and pricing policies," MPRA Paper 25812, University Library of Munich, Germany.
    12. Alina Nastasoiu & Neil T. Bendle & Charan K. Bagga & Mark Vandenbosch & Salvador Navarro, 2021. "Separating customer heterogeneity, points pressure and rewarded behavior to assess a retail loyalty program," Journal of the Academy of Marketing Science, Springer, vol. 49(6), pages 1132-1150, November.
    13. Dorotic, Matilda & Verhoef, Peter C. & Fok, Dennis & Bijmolt, Tammo H.A., 2014. "Reward redemption effects in a loyalty program when customers choose how much and when to redeem," International Journal of Research in Marketing, Elsevier, vol. 31(4), pages 339-355.
    14. Richards, Timothy J. & Liaukonyte, Jura, 2018. "Switching Cost and Store Choice," 2018 Annual Meeting, August 5-7, Washington, D.C. 274201, Agricultural and Applied Economics Association.
    15. Nastasoiu, Alina & Vandenbosch, Mark, 2019. "Competing with loyalty: How to design successful customer loyalty reward programs," Business Horizons, Elsevier, vol. 62(2), pages 207-214.
    16. Bazargan, Amirhossein & Karray, Salma & Zolfaghari, Saeed, 2017. "Modeling reward expiry for loyalty programs in a competitive market," International Journal of Production Economics, Elsevier, vol. 193(C), pages 352-364.
    17. Hollenbeck, Brett & Taylor, Wayne, 2019. "Leveraging Loyalty Programs Using Competitor Based Targeting," MPRA Paper 92900, University Library of Munich, Germany.
    18. Chenghuan Sean Chu & Phillip Leslie & Alan Sorensen, 2006. "Nearly Optimal Pricing for Multiproduct Firms," 2006 Meeting Papers 830, Society for Economic Dynamics.
    19. Malika Chaudhuri & Clay M. Voorhees & Jonathan M. Beck, 2019. "The effects of loyalty program introduction and design on short- and long-term sales and gross profits," Journal of the Academy of Marketing Science, Springer, vol. 47(4), pages 640-658, July.
    20. 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.

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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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