Are loyalty-rewarding pricing schemes anti-competitive?


Many economists and policy analysts seem to believe that loyaltyrewarding pricing schemes, like frequent flyer programs, tend to reinforce firm's market power and hence are detrimental to consumer welfare. The existing academic literature has supported this view to some extent. In contrast, we argue that these programs are business stealing devices that enhance competition, in the sense of generating lower average transaction prices and higher consumer surplus. This result is robust to alternative specifications of the firms' commitment power and demand structures, and is derived in a theoretical model whose main predictions are compatible with the sparse empirical evidence.
Published as: Are Loyalty-Rewarding Pricing Schemes Anticompetitive? in International Journal of Industrial Organization , Vol. 25, No. 4, 657--674, January, 2007