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The design and efficiency of loyalty rewards

Ramon Caminal ()

UFAE and IAE Working Papers from Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC)

Abstract: The goal of this paper is to reexamine the optimal design and efficiency of loyalty rewards in markets for final consumption goods. While the literature has emphasized the role of loyalty rewards as endogenous switching costs (which distort the efficient allocation of consumers), in this paper I analyze the ability of alternative designs to foster consumer participation and increase total surplus. First, the efficiency of loyalty rewards depend on their specific design. A commitment to the price of repeat purchases can involve substantial efficiency gains by reducing price-cost margins. However, discount policies imply higher future regular prices and are likely to reduce total surplus. Second, firms may prefer to set up inefficient rewards (discounts), especially in those circumstances where a commitment to the price of repeat purchases triggers Coasian dynamics.

Keywords: Loyalty rewards; Coasian dynamics; Price commitment; Coupons (search for similar items in EconPapers)
JEL-codes: D42 D43 L12 L13 (search for similar items in EconPapers)
Pages: 30
Date: 2009-10-26
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Related works:
Journal Article: The Design and Efficiency of Loyalty Rewards (2012) Downloads
Working Paper: The design and efficiency of loyalty rewards (2009) Downloads
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