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Price discrimination through multi-level loyalty programs

Author

Listed:
  • Serdar Sayman

    (Koç University)

  • Murat Usman

    (Koç University)

Abstract

Loyalty programs often feature multiple rewards with different requirements; for instance, an airline offering a free domestic ticket for 10 K miles, and an international ticket for 20 K miles. This research focuses on the role of multi-level rewards as a segmentation and price discrimination mechanism: Multi-level rewards can increase firm profits when buyers differ in purchase frequency and/or time discount factor. We propose that a program with two rewards can be designed in such a way that (i) it is more profitable than a one-reward program, and (ii) buyers self-select. Light users prefer to receive the smaller reward two times over receiving the larger reward one time, even though the smaller reward is less than half of the larger reward. We show that the smaller reward helps the firm enlarge its base in the light user segment. We also compare multi-level programs with quantity discounts.

Suggested Citation

  • Serdar Sayman & Murat Usman, 2016. "Price discrimination through multi-level loyalty programs," Marketing Letters, Springer, vol. 27(4), pages 687-697, December.
    • Handle: RePEc:kap:mktlet:v:27:y:2016:i:4:d:10.1007_s11002-015-9385-7
    DOI: 10.1007/s11002-015-9385-7
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    References listed on IDEAS

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    Cited by:

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    2. Wang, Sujuan & Hu, Qiying & Liu, Weiqi, 2017. "Price and quality-based competition and channel structure with consumer loyalty," European Journal of Operational Research, Elsevier, vol. 262(2), pages 563-574.

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