Are loyalty-rewarding pricing schemes anti-competitive?

Caminal, Ramon; Claici, Adina

doi:10.1016/j.ijindorg.2006.07.004

Cited by 52 publications

(35 citation statements)

References 16 publications

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“…This will be because they will not be able to capture the entire surplus through the first period price, which in this case will be closer to the static monopoly price. Caminal and Claici (2007) obtain the same result in a different framework.…”

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confidence: 55%

The Design and Efficiency of Loyalty Rewards

Caminal

2012

Economics Manag Strategy

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The goal of this paper is to reexamine the optimal design and e¢ ciency of loyalty rewards in markets for …nal consumption goods. While the literature to date has emphasized the role of loyalty rewards as endogenous switching costs (which distort the e¢ cient allocation of consumers), l analyze instead the ability of alternative designs to foster consumer participation and increase total surplus. First, the e¢ ciency of loyalty rewards depend on their speci…c design. A commitment to the price of repeat purchases can involve substantial e¢ ciency gains by reducing price-cost margins. However, discount policies imply higher future regular prices and are likely to reduce total surplus. Second, …rms may prefer to set up ine¢ cient rewards (discounts), especially in circumstances where a commitment to the price of repeat purchases triggers Coasian dynamics. JEL Classi…cation Numbers: D42, D43, L12, L13

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confidence: 55%

The Design and Efficiency of Loyalty Rewards

Caminal

2012

Economics Manag Strategy

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“…A familiar theme of this literature is that enticing brand switching is the equilibrium outcome when oligopoly firms can price by consumers' purchase history; the resulting price discrimination reduces industry profits and often, but not always, benefits consumers. In a different direction, Banerjee and Summers (1987), Caminal and Matutes (1990), and Caminal and Claici (2007), among others, have studied loyalty‐inducing arrangements, such as frequent‐flier programs. This second literature assumes that firms can make certain future price commitments to their repeat customers, which may or may not intensify competition.…”

Section: Introductionmentioning

confidence: 99%

Dynamic pricing: when to entice brand switching and when to reward consumer loyalty

Chen¹,

Pearcy

2010

The RAND Journal of Economics

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This article develops a theory of dynamic pricing in which firms may offer separate prices to different consumers based on their past purchases. Brand preferences over two periods are described by a copula admitting various degrees of positive dependence. When commitment to future prices is infeasible, each firm offers lower prices to its rival's customers. When firms can commit to future prices, consumer loyalty is rewarded if preference dependence is low, but enticing brand switching occurs if preference dependence is high. Our theory provides a unified treatment of the two pricing policies and sheds light on observed practices across industries. Copyright (c) 2010, RAND..

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“…Most existing work is based on two‐period models, and the results of these studies indicate that the impact of such discounts on competition is mixed and sensitive to changes in assumptions. Although Banerjee and Summers (1987) and Kim et al (2001) find that such programs/discounts are anti‐competitive, Caminal and Matutes (1990) and Caminal and Claici (2007) argue that these programs/discounts tend to increase business stealing and, thus, promote competition. The difference in these findings can be attributed to the difference in the assumptions made regarding consumer heterogeneity, product heterogeneity, the change in consumer taste from the first to the second period, the types of discounts/coupons being offered, and the market structure (number of firms).…”

Section: Introductionmentioning

confidence: 99%

Loyalty Rewards Facilitate Tacit Collusion

Fong

Liu

2011

Economics Manag Strategy

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Using a dynamic overlapping-generations model, we show that loyalty rewards robustly facilitate tacit collusion. We compare the sustainability of tacit collusion when uniform prices are used, when loyal customers are rewarded without using commitment, and when loyalty rewards are implemented by committing to offering customers either lower fixed repeat-purchase prices or fixed repeat-purchase discounts. We find that, relative to uniform prices, rewarding loyalty without using commitment on the equilibrium path makes tacit collusion easier to sustain, because a deviating firm is unable to steal one period of industry profit before losing all future profits. When loyalty rewards are offered by firms committing to repeat-purchase prices, collusion is even easier to sustain, because a deviating firm cannot renege on its discounted price for repeat-purchase customers. When firms commit to repeat-purchase discounts, they also commit to lowering the price for their repeat-purchase customers if they undercut the regular price, rendering tacit collusion to be even We thank the coeditor and two referees for very helpful comments and suggestions. We also thank

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Are loyalty-rewarding pricing schemes anti-competitive?

Cited by 52 publications

References 16 publications

The Design and Efficiency of Loyalty Rewards

The Design and Efficiency of Loyalty Rewards

Dynamic pricing: when to entice brand switching and when to reward consumer loyalty

Loyalty Rewards Facilitate Tacit Collusion

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