DP5353 Are loyalty-rewarding pricing schemes anti-competitive?

Author(s): Ramon Caminal, Adina Claici
Publication Date: November 2005
Keyword(s): coupons, price commitment, repeat purchases, switching costs
JEL(s): D43, L13
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=5353

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.