Moral Hazard and Customer Loyalty Programs

Leonardo J. Basso, Matthew T. Clements and Thomas Ross

American Economic Journal: Microeconomics, 2009, vol. 1, issue 1, 101-23

Abstract: Frequent-flier plans (FFPs) may be the most famous of customer loyalty programs, and there are similar schemes in other industries. We present a theory that models FFPs as efforts to exploit the agency relationship between employers (who pay for tickets) and employees (who book travel). FFPs "bribe" employees to book flights at higher prices. While a single airline offering an FFP has an advantage, competing FFPs can result in lower profits for airlines even while ticket prices rise. Thus, in contrast to switching-cost treatments of FFPs, we may observe prices and profits moving in opposite directions. (JEL D82, L93, M31)

JEL-codes: D82 L93 M31 (search for similar items in EconPapers)
Date: 2009
Note: DOI: 10.1257/mic.1.1.101
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Citations: View citations in EconPapers (28)

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