Identification of Dynamic Models of Rewards Programme
Published in Japanese Economic Review, vol.69(3): 306-323, 2018
29 Pages Posted: 9 Jun 2015 Last revised: 14 May 2019
Date Written: March 29, 2017
'Frequent-buyer' type of rewards program is a commonly used marketing tool for companies to compete for market shares. It also provides an unique environment for studying consumer's forward-looking behavior. The consumer's problem on accumulating reward points can be formulated as a stationary infinite horizon discrete choice dynamic programming (DDP) model. We show that the parameters of this model, including the discount factor, are well-identified. In particular, it is possible to identify state-dependent discount factors (i.e., discount factors can vary with the number reward points). We discuss how this identification result is related to the goal-gradient hypothesis studied in the consumer psychology literature.
Keywords: Reward Programs, Discount Factor, Dynamic Programming, Discrete Choice Models
JEL Classification: C11, C35, C61, D91, M31
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