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T he D esign and E fficiency of L oyalty R ewards
Author(s) -
Caminal Ramon
Publication year - 2012
Publication title -
journal of economics and management strategy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.672
H-Index - 68
eISSN - 1530-9134
pISSN - 1058-6407
DOI - 10.1111/j.1530-9134.2012.00334.x
Subject(s) - microeconomics , economics , loyalty , economic surplus , consumption (sociology) , set (abstract data type) , advertising , business , marketing , computer science , social science , sociology , welfare , market economy , programming language
The goal of this paper is to reexamine the optimal design and efficiency of loyalty rewards (LRs) in markets for final consumption goods. Although the literature to date has emphasized the role of LRs as endogenous switching costs (which distort the efficient allocation of consumers), l analyze instead the ability of alternative designs to foster consumer participation and increase total surplus. First, the efficiency of LRs depends 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 circumstances where a commitment to the price of repeat purchases triggers Coasian dynamics.