Sticky Rebates: Loyalty Rebates Impede Rational Switching of Consumers
49 Pages Posted: 15 Jul 2012
Date Written: July 14, 2012
Antitrust policy often still 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. They should therefore be put under legal scrutiny.
Keywords: Biases, Prospect theory, Consumer decision making, Rebates, Antitrust
JEL Classification: D03, K21, L11, L42
Suggested Citation: Suggested Citation