Sticky Rebates: Loyalty Rebates Impede Rational Switching of Consumers

49 Pages Posted: 15 Jul 2012

See all articles by Alexander Morell

Alexander Morell

University of Mannheim

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: July 14, 2012

Abstract

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

Morell, Alexander and Glöckner, Andreas and Towfigh, Emanuel V., Sticky Rebates: Loyalty Rebates Impede Rational Switching of Consumers (July 14, 2012). 7th Annual Conference on Empirical Legal Studies Paper, Available at SSRN: https://ssrn.com/abstract=2106094 or http://dx.doi.org/10.2139/ssrn.2106094

Alexander Morell (Contact Author)

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Andreas Glöckner

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, 65189
Germany
+49 611 7102-2253 (Phone)
+49 611 7102-10-2253 (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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