Do Frequency Reward Programs Create Switching Costs? A Dynamic Structural Analysis of Demand in a Reward Program

36 Pages Posted: 4 Aug 2006 Last revised: 28 Oct 2007

See all articles by Wesley R. Hartmann

Wesley R. Hartmann

Stanford Graduate School of Business

V. Brian Viard

Cheung Kong Graduate School of Business

Date Written: October 27, 2007

Abstract

This paper examines a common assertion that customers in reward programs become "locked in" as they accumulate credits toward earning a reward. We define a measure of switching costs and use a dynamic structural model of demand in a reward program to illustrate that frequent customers' purchase incentives are practically invariant to the number of credits. In our empirical example, these customers comprise over eighty percent of all rewards and over two-thirds of all purchases. Less frequent customers may face substantial switching costs when close to a reward, but rarely reach this state.

Keywords: switching costs, reward programs, dynamic programming, discrete-choice

JEL Classification: L11, L13, M31, D43

Suggested Citation

Hartmann, Wesley R. and Viard, V. Brian, Do Frequency Reward Programs Create Switching Costs? A Dynamic Structural Analysis of Demand in a Reward Program (October 27, 2007). Available at SSRN: https://ssrn.com/abstract=921877 or http://dx.doi.org/10.2139/ssrn.921877

Wesley R. Hartmann

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

V. Brian Viard (Contact Author)

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China
86-10-8518-8858 (Phone)
86-10-8518-6800 (Fax)

HOME PAGE: http://english.ckgsb.edu.cn/faculty_content/brian-viard

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