Competing with Loyalty Discounts

Abstract

Loyalty discounts, offered to customers that meet purchase thresholds, can shift share from rival firms. In a differentiated product duopoly, only one firm employs a program that customers adopt in equilibrium. Whenever consumers strongly prefer the product of said firm, such discounts increase producer surplus. When a firm requires customers to meet thresholds in multiple rivalrous markets, the loyalty discount and consumer surplus may fall. Finally, when a branded product monopolist faces competition for an unrelated generic product, the monopolist raises the branded spot price, and offers a discount to customers that purchase generic product only from the monopolist.

Keywords: Loyalty discounts, fidelity programs, exclusive dealing, nonlinear pricing

JEL Classification: L42, L13, D43