Artificial Compatibility, Barriers to Entry, and Frequent-Flyer Programs

Robert Cairns and John Galbraith

Canadian Journal of Economics, 1990, vol. 23, issue 4, 807-16

Abstract: If supplier firms can discriminate between buyers (agents) acting on behalf of employers (principals) and those making purchases for themselves, then these firms may be able to create demand-side entry barriers by creating what may be called "artificial compatibility" between otherwise unrelated goods or services. Even if there are no differences in costs between incumbent and potential entrant, there will be an incentive to offer in-kind inducements to agents; these inducements may lead to entry barriers, and their use may be a Nash equilibrium. We argue that "frequent-flyer" programs are instances of the creation of such artificial compatibility.

Date: 1990
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