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Loyalty Rewards and Monopoly Pricing

Author

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  • Philipp Ackermann

Abstract

This article examines the impact of customer reward programs on the competitive outcome in duopolistic markets. We argue that loyalty discounts for repeat customers constitute a commitment device beneficial to suppliers rather than customers. Analyzing a two-period Bertrand model we show that the use of loyalty discounts makes it possible for duopolists to attain the fully collusive outcome in both periods. By offering generous loyalty discounts, the firms can credibly commit to refrain from second period poaching given that they attract enough customers in period one. Loyalty discounts invite firms to collude in the first period.

Suggested Citation

  • Philipp Ackermann, 2010. "Loyalty Rewards and Monopoly Pricing," Diskussionsschriften dp1002, Universitaet Bern, Departement Volkswirtschaft.
    • Handle: RePEc:ube:dpvwib:dp1002
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    File URL: https://repec.vwiit.ch/dp/dp1002.pdf
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    Cited by:

    1. Foschi, Matteo, 2017. "Self-Control in the Retailing Industry: Inducing Rejection of Loyalty Schemes," CRETA Online Discussion Paper Series 37, Centre for Research in Economic Theory and its Applications CRETA.

    More about this item

    Keywords

    switching costs; customer reward programs; loyalty discounts; repeat purchases; coupons; mixed equilibria;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L41 - Industrial Organization - - Antitrust Issues and Policies - - - Monopolization; Horizontal Anticompetitive Practices

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