Searching for Rewards

What the paper says

Loyalty programs are widespread across various markets, offering members rewards based on their past purchases for future benefits. This study offers new insights into the strategic use of loyalty programs and their impact on market competition by exploring the dynamics of loyalty programs within a repeated ordered search framework, in which consumers sequentially search for the optimal product across multiple firms over two periods. Our findings highlight distinct roles for price discounts and rewards in influencing consumer decisions. Price discounts discourage further search in the current shopping period, whereas rewards encourage consumer loyalty by inducing prominence in subsequent visits. As search costs increase, firms tend to offer lower price discounts but higher rewards, and this results in a higher industry profit but lower consumer surplus. Compared with their absence, loyalty programs decrease both industry profit and consumer welfare, leading to a lose–lose outcome. Moreover, we demonstrate that, when the firms are heterogeneous in terms of their network sizes, those with larger networks tend to offer lower rewards yet achieve greater consumer loyalty in contrast to the firms with smaller networks, which compensate with higher rewards. This paper was accepted by Dmitri Kuksov, marketing. Funding: T.T. Ke acknowledges financial support from the National Natural Science Foundation of China [Grants 72422003 and 72394395] and the Hong Kong Research Grants Council [Grant 14503122]. X. Zhu acknowledges support from INFORMS Society for Marketing Science Doctoral Early Stage Research Grant (awarded in 2023). Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2024.05203 .