Consumer Loyalty Programs and Retail Prices: Evidence from Gasoline Markets

31 Pages Posted: 25 May 2021

See all articles by Federico Rossi

Federico Rossi

Purdue University - Krannert School of Management

Pradeep K. Chintagunta

University of Chicago

Date Written: May 24, 2021

Abstract

Past research shows that loyalty programs can generate switching costs for consumers and increase their purchase frequency. Theoretical work suggests that if switching costs are significant, firms should charge lower prices in the early periods of a program to boost market share, and increase prices in later periods, to take advantage of the ``lock-in'' effect. However, it is not clear whether these costs soften or exacerbate price competition. Using a large database of gas stations' prices in the Italian market, we study fuel prices in early and late periods of loyalty programs: the sharp price changes adopted by gas stations affiliated with the program during the introduction and termination dates of the program allow us to establish the causal relationship between the program and the pricing behavior of gas stations. We find evidence that gas stations affiliated with the program increase prices in later periods of the program, as predicted by theory. The higher prices of affiliated stations lead to an increase in prices, on average, across all other stations competing in the local market. We also find that affiliated stations reduce their prices in early periods of the program; however, this evidence is less conclusive, as our data cannot exclude other factors explaining the price reduction. We discuss implications for managers and policy makers.

Keywords: Loyalty Programs, Reward Programs, Pricing, Natural Experiment

Suggested Citation

Rossi, Federico and Chintagunta, Pradeep K., Consumer Loyalty Programs and Retail Prices: Evidence from Gasoline Markets (May 24, 2021). Available at SSRN: https://ssrn.com/abstract=3852324 or http://dx.doi.org/10.2139/ssrn.3852324

Federico Rossi (Contact Author)

Purdue University - Krannert School of Management ( email )

403 W. State Street
West Lafayette, IN 47907-2056
United States

Pradeep K. Chintagunta

University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-8015 (Phone)
773-702-0458 (Fax)

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