Sticky Rebates: Rollback Rebates Induce Non-Rational Loyalty in Consumers

Alexander Morell (), Andreas Glöckner () and Emanuel Towfigh ()
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Alexander Morell: Max Planck Institute for Research on Collective Goods
Andreas Glöckner: Max Planck Institute for Research on Collective Goods
Emanuel Towfigh: Max Planck Institute for Research on Collective Goods

No 2009_23, Discussion Paper Series of the Max Planck Institute for Research on Collective Goods from Max Planck Institute for Research on Collective Goods

Abstract: Competition policy often relies on the assumption of a rational consumer, although other models may better account for people’s decision behavior. In three experiments, we investigate the influence of loyalty rebates on consumers based on the alternative Cumulative Prospect Theory (CPT), both theoretically and experimentally. CPT predicts that loyalty rebates could harm consumers by impeding rational switching from an incumbent to an outside option (e.g., a market entrant). In a repeated trading task, participants decided whether or not to enter a loyalty rebate scheme and to continue buying within that scheme. Meeting the condition triggering the rebate was uncertain. Loyalty rebates considerably reduced the likelihood that participants switched to a higher-payoff outside option later. We conclude that loyalty rebates may inflict substantial harm on consumers and may have an underestimated potential to foreclose consumer markets.

Date: 2009-08, Revised 2013-02
New Economics Papers: this item is included in nep-cbe
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