Are Loyalty-Rewarding Pricing Schemes Anti-Competitive?

42 Pages Posted: 6 Jan 2006

See all articles by Ramon Caminal

Ramon Caminal

Universitat Autonoma de Barcelona - Institut d'Analisi Economica, CSIC; Centre for Economic Policy Research (CEPR)

Adina Claici

Universidad de Alicante - Department of Economic Analysis

Date Written: November 2005

Abstract

Many economists and policy analysts seem to believe that loyalty-rewarding pricing schemes, like frequent flyer programs, tend to reinforce firms' market power and hence are detrimental to consumer welfare. The existing academic literature has supported this view to some extent. In contrast, we argue that these programs are business stealing devices that enhance competition, in the sense of generating lower average transaction prices and higher consumer surplus. This result is robust to alternative specifications of the firms' commitment power and demand structures, and is derived in a theoretical model whose main predictions are compatible with the sparse empirical evidence.

Keywords: Repeat purchases, switching costs, price commitment, coupons

JEL Classification: D43, L13

Suggested Citation

Caminal, Ramon and Claici, Adina, Are Loyalty-Rewarding Pricing Schemes Anti-Competitive? (November 2005). CEPR Discussion Paper No. 5353, Available at SSRN: https://ssrn.com/abstract=874073

Ramon Caminal (Contact Author)

Universitat Autonoma de Barcelona - Institut d'Analisi Economica, CSIC ( email )

08193 Bellaterra
Spain
+34 93 580 6612 (Phone)
+34 93 580 1452 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Adina Claici

Universidad de Alicante - Department of Economic Analysis ( email )

03080 Alicante
Spain

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