Sticky Rebates: Target Rebates Induce Non-Rational Loyalty in Consumers

37 Pages Posted: 4 Aug 2009 Last revised: 22 Feb 2013

See all articles by Alexander Morell

Alexander Morell

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Andreas Glöckner

Max Planck Institute for Research on Collective Goods; University of Cologne

Emanuel V. Towfigh

EBS Law School; Max Planck Institute for Research on Collective Goods

Date Written: February 2013

Abstract

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.

Keywords: biases, antitrust, rebates, prospect theory, consumer decision-making

Suggested Citation

Morell, Alexander and Glöckner, Andreas and Towfigh, Emanuel V., Sticky Rebates: Target Rebates Induce Non-Rational Loyalty in Consumers (February 2013). MPI Collective Goods Preprint, No. 2009/23. Available at SSRN: https://ssrn.com/abstract=1443783 or http://dx.doi.org/10.2139/ssrn.1443783

Alexander Morell

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

Andreas Glöckner (Contact Author)

Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

HOME PAGE: http://www.coll.mpg.de/team/page/andreas_gloeckner

University of Cologne ( email )

Richard-Strauss-Str. 2
Köln, 50931
Germany

HOME PAGE: http://soccco.uni-koeln.de/andreas-gloeckner.html

Emanuel V. Towfigh

EBS Law School ( email )

Gustav-Stresemann-Ring 3
Wiesbaden, Hessen 65189
Germany
+49 621 7102-2253 (Phone)
+49 621 7021-10-2253 (Fax)

HOME PAGE: http://www.lehrstuhl-towfigh.de

Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany
+49 228 91416-30 (Phone)
+49 228 91416-930 (Fax)

HOME PAGE: http://www.coll.mpg.de/team/page/emanuel_towfigh

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