Reaching for Gold: Frequent-Flyer Status Incentives and Moral Hazard

A. Yeşim Orhun (), Tong Guo () and Andreas Hagemann ()
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A. Yeşim Orhun: University of Michigan, Ann Arbor, Michigan 48109
Tong Guo: Duke University, Durham, North Carolina 27708
Andreas Hagemann: University of Michigan, Ann Arbor, Michigan 48109

Marketing Science, 2022, vol. 41, issue 3, 548-574

Abstract: We study how frequent-flyer program members change their purchase behaviors as they progress toward achieving elite status. Using data from a leading U.S. airline, we empirically test the theoretical prediction that travelers’ switching costs vary dynamically with their progress toward attaining status. We show evidence for increased switching costs as the consumer approaches the target pace of point accumulation required to attain status. These switching costs reflect changes in booking behavior with the airline: Travelers become more likely to choose the airline even when it is less appealing than its competitors, and to pay higher prices than they otherwise would. These responses are reduced when travelers accumulate points at a rate substantially ahead of the target pace. The increase in switching costs is more pronounced for consumers at a hub of the airline and for business travelers. Moreover, we document a stronger willingness-to-pay response when consumers are less likely to shoulder the ticket costs themselves because they are traveling for business. This response suggests that asymmetric incentives induced by business travel explain much of the heterogeneity between business and leisure travelers, and moral hazard may be responsible for a large part of the profitability of frequent-flyer status incentives.

Keywords: loyalty programs; tiered status incentives; moral hazard; customer relationship management (CRM) (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:41:y:2022:i:3:p:548-574

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