Market Power and Redeemable Loyalty Token Design

Digitalization has led to a rapid expansion of loyalty tokens typically bundled as part of product price. An open question is whether, as technology evolves, firms will have a strong incentive to make loyalty tokens tradable, thereby raising regulation issues, including for monetary and banking authorities. Our main finding is that, under fairly general assumptions, firms will still have strong incentives to maintain non-tradability. This may seem surprising, given that an individual consumer would be willing to pay a premium for tradable tokens. However, provided the tokens do not offer a convenience yield to non-platform consumers, non-tradability compensates by expanding the outstanding stock of tokens outstanding at any one time, thereby providing a better overall form of financing. We further show that an issuer with stronger market power tends to make its revenue more token-dependent. Empirical results from airline mileage and hotel reward programs align with our theory.