Identification of Dynamic Models of Rewards Programme

Andrew Ching and Masakazu Ishihara

The Japanese Economic Review, 2018, vol. 69, issue 3, 306-323

Abstract: “Frequent‐buyer” rewards programmes are commonly used by companies as a marketing tool to compete for market share. They provide a unique environment for studying consumers’ forward‐looking behaviour. The consumer's problem on accumulating reward points can be formulated as a stationary infinite horizon discrete choice dynamic programming model. We show that the parameters of this model, including the discount factor, are well‐identified. In particular, it is possible to identify state‐dependent discount factors (i.e. discount factors can vary with the number of reward points). We discuss how this identification result is related to the goal‐gradient hypothesis studied in the consumer psychology literature.

Date: 2018
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