Sticky Rebates: Target Rebates Induce Non-Rational Loyalty in Consumers
Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods
Max Planck Institute for Research on Collective Goods
Emanuel V. Towfigh
Max Planck Institute for Research on Collective Goods; New York University School of Law
MPI Collective Goods Preprint, No. 2009/23
Competition policy often relies on the assumption of a rational consumer, although other models may better account for people’s decision behavior. In three experiments, we investigate the influence of loyalty rebates on consumers based on the alternative Cumulative Prospect Theory (CPT), both theoretically and experimentally. CPT predicts that loyalty rebates could harm consumers by impeding rational switching from an incumbent to an outside option (e.g., a market entrant). In a repeated trading task, participants decided whether or not to enter a loyalty rebate scheme and to continue buying within that scheme. Meeting the condition triggering the rebate was uncertain. Loyalty rebates considerably reduced the likelihood that participants switched to a higher-payoff outside option later. We conclude that loyalty rebates may inflict substantial harm on consumers and may have an underestimated potential to foreclose consumer markets.
Number of Pages in PDF File: 37
Keywords: biases, antitrust, rebates, prospect theory, consumer decision-makingworking papers series
Date posted: August 4, 2009 ; Last revised: February 22, 2013
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