The Design and Efficiency of Loyalty Rewards

Abstract

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

Time‐Limited Loyalty Rewards*

“…In addition, the monopolist can appropriate some of these extra surplus through the regular price. The current model can be considered an infinite horizon version of the two‐period monopoly models examined earlier (see, for instance, Crémer [1985] and Caminal [2012]).Building a truly dynamic model allows me to focus on the main goal of this paper: the motivation and implications of setting time limits on reward redemption. Next, I examine the consequences of lifting these time restrictions.…”

“…The theoretical literature on loyalty programs has examined the optimal design of rewards in a monopoly setting (Crémer, 1985;Caminal, 2012), its pro-or anti-competitive 1 Bryan Pearson (2014), Four Big Di¤erences between US and Europe Loyalty programs. Yahoo Small Business https://smallbusiness.yahoo.com/advisor/four-big-di¤erences-between-u-european-loyalty-programs-030144436.html 2 Loyalty rewards are popular not only in consumer goods markets but also in markets for intermediate goods.…”

“…The theoretical literature on loyalty programs has examined the optimal design of rewards in a monopoly setting (Crémer [1985]; Caminal [2012]), their pro-or anti-competitive effects (Banerjee and Summers [1987]; Caminal and Matutes [1990]; Cairns and Galbraith [1990]; Bulkley [1992]; Fudenberg and Tirole [2000]; Kim et al [2001]; Caminal and Claici [2007]; Chen and Pearcy [2010]; Fong and Liu [2011]; Brito and Vasconcelos [2015]), 4 and the role of loyalty programs in exploiting the agency problem between employers 1 Loyalty rewards are popular not only in consumer goods markets but also in markets for intermediate goods. The analysis of the latter case has mainly focused on the relative nature of the rewards (i.e., market share discounts) and the dominant position of firms offering the discounts.…”

“…Coupons generate time inconsistency. More specifically, the presence of consumers with coupons leads firms to set regular prices above the ex-ante optimal level; see, for instance,Caminal [2012]. In this paper, I will restrict my attention to a fixed-price commitment.© 2022 The Author.…”

Identification of Dynamic Models of Rewards Programme

“…Early studies in economics and marketing examined the role of reward programmes in generating switching costs and the implications for price competition (e.g. Banerjee and Summers, ; Caminal and Mautes, ; Kim et al ., ; Caminal and Claici, ; Hartmann and Viard, ; Chen and Pearcy, ; Fong and Liu, ; Caminal, ). Recently, detailed customer‐level reward programme data have led researchers to investigate a wider range of empirical issues related to reward programmes.…”