Working Paper: CEPR ID: DP5353
Authors: Ramn Caminal; Adina Claici
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: coupons; price commitment; repeat purchases; switching costs
JEL Codes: D43; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Loyalty-rewarding pricing schemes (D43) | Enhance competition (L13) |
| Loyalty-rewarding pricing schemes (D43) | Reduce average transaction prices (P22) |
| Loyalty-rewarding pricing schemes (D43) | Increase consumer welfare (D69) |
| Loyalty programs (L42) | Consumer demand lock-in (D16) |
| Loyalty programs (L42) | Strategic effects on future pricing set by rivals (D43) |
| Loyalty programs (L42) | Barriers to entry under certain conditions (D43) |
| Loyalty programs (L42) | Enhance competition (L13) |
| Enhancements to frequent flyer programs (L93) | Increases in market share for airlines (L93) |