Frequency Loyalty Programs in an Asymmetric Duopoly Market: Theoretical and Empirical Investigations
Posted: 9 Oct 2010
Date Written: October 8, 2010
This paper examines frequency loyalty programs in an asymmetric duopoly market where one firm has more service locations than the other. We have analyzed the empirical data from a quasi-field experiment in a duopoly gasoline market where the larger firm initially started a full-scale loyalty program but later switched to a partial-scale loyalty program. We found that the larger firm’s loyalty program significantly increased that firm’s market share in the regular gasoline market more than in the premium gasoline market. The equilibrium analysis of a game theoretical model reveals that the optimal scale of a firm’s loyalty program shall increase with the firm’s profit margin as well as the size of the “moving” segment of consumers whose location preferences change over time (i.e., taxi drivers). The theoretical results are consistent with the empirical findings because the regular gasoline market had a sufficiently large “moving” segment while the premium gasoline market did not. Moreover, the larger firm switched from a full-scale loyalty program to a partial-scale program when both the gasoline consumption by taxi drivers as a percentage of total sales and the profit margins of the regular gasoline decreased over time.
Keywords: frequency loyalty programs, network externality, switching costs, field experiment
JEL Classification: M31
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