Journal
QME-QUANTITATIVE MARKETING AND ECONOMICS
Volume 6, Issue 2, Pages 109-137Publisher
SPRINGER
DOI: 10.1007/s11129-007-9035-3
Keywords
switching costs; reward programs; dynamic programming; discrete-choice
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This paper examines a common assertion that customers in reward programs become locked in as they accumulate credits toward earning a reward. We define a measure of switching costs and use a dynamic structural model of demand in a reward program to illustrate that frequent customers' purchase incentives are practically invariant to the number of credits. In our empirical example, these customers comprise over 80% of all rewards and over two-thirds of all purchases. Less frequent customers may face substantial switching costs when close to a reward, but rarely reach this state.
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