The Design and Efficiency of Loyalty Rewards

32 Pages Posted: 11 Jan 2010

See all articles by Ramon Caminal

Ramon Caminal

Universitat Autonoma de Barcelona - Institut d'Analisi Economica, CSIC; Centre for Economic Policy Research (CEPR)

Date Written: December 2009

Abstract

The goal of this paper is to reexamine the optimal design and efficiency of loyalty rewards in markets for final consumption goods. While the literature has emphasized the role of loyalty rewards as endogenous switching costs (which distort the efficient allocation of consumers), in this paper I analyze the ability of alternative designs to foster consumer participation and increase total surplus. First, the efficiency of loyalty rewards depend on their specific design. A commitment to the price of repeat purchases can involve substantial efficiency gains by reducing price-cost margins. However, discount policies imply higher future prices and are likely to reduce total surplus. Second, firms may prefer to set up inefficient rewards (discounts), especially in those circumstances where a commitment to the price of repeat purchases triggers Coasian dynamics.

Keywords: Coasian dynamics, coupons, loyalty rewards, price commitment

JEL Classification: D42, D43, L12, L13

Suggested Citation

Caminal, Ramon, The Design and Efficiency of Loyalty Rewards (December 2009). CEPR Discussion Paper No. DP7588, Available at SSRN: https://ssrn.com/abstract=1533193

Ramon Caminal (Contact Author)

Universitat Autonoma de Barcelona - Institut d'Analisi Economica, CSIC ( email )

08193 Bellaterra
Spain
+34 93 580 6612 (Phone)
+34 93 580 1452 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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