From Silver to Platinum: The Effect of Frequent Flier Tier Levels on Airline Demand

Abstract

We estimate the switching costs created by tier levels, one of the main components of frequent flier programs, by exploiting discrete tier thresholds. We first demonstrate that members increase their demand to reach a higher tier level just before the end of the calendar year when tier levels are determined, but do not manipulate demand in earlier months. This allows for a novel fuzzy discontinuity approach to identify causal demand effects of higher tier levels, from which we derive the switching costs. While the lowest level creates only negligible switching costs, the switching costs associated with the highest tier level are in the range of 30 - 41% of the price of a ticket. These results are consistent with the use of tier levels to induce loyalty from high-demand members who are not affected by free flight awards.

Keywords: customer loyalty, switching costs, frequent flier program, fuzzy regression discontinuity, manipulated running variables

JEL Classification: L22