Jump to ContentJump to Main Navigation
Show Summary Details
More options …

Review of Marketing Science


CiteScore 2018: 0.12

SCImago Journal Rank (SJR) 2018: 0.114
Source Normalized Impact per Paper (SNIP) 2018: 0.070

Online
ISSN
1546-5616
See all formats and pricing
More options …

The Economic Viability of Frequency Reward Programs in a Strategic Competitive Environment

Praveen K Kopalle / Scott A Neslin
Published Online: 2003-08-07 | DOI: https://doi.org/10.2202/1546-5616.1002

We examine the conditions that enhance the economic viability of frequency reward programs in a strategic competitive environment. We focus particularly on conditions related to consumer behavior, namely the extent to which consumers value the future benefits offered by the reward, the expandability of the category, and consumers’ preferences for competing brands. Consumers maximize utility over a long-term time horizon, taking into account the value of the reward. Two firms maximize profits over a long-term time horizon. They first decide between implementing a frequency reward program or a traditional pricing policy (a constant price), and then decide on the specific prices. We numerically solve for the sub-game perfect equilibrium for this two-stage game. We find that a brand is more likely to find reward programs to be viable strategies if consumers value future benefits, if reward programs can expand the market, and if the brand has a higher preference. The market expandability finding is particularly interesting. If the sales increases generated by reward programs represent category growth, the power of frequency reward programs makes them an effective vehicle for generating profits. However, if gains come mainly from competitors, the power of frequency reward programs precipitates a strong competitive response that erodes profits in a classic prisoner’s dilemma. We use the airline industry to explore our market expandability finding. We find evidence that the “major” airlines introduced reward programs to counter-act a stronger outside category (new entrants), and in doing so, they expanded their market.

Keywords: Pricing; Frequency Reward Programs; Dynamic Decision Models; Switching Costs

About the article

Published Online: 2003-08-07


Citation Information: Review of Marketing Science, Volume 1, Issue 1, ISSN (Online) 1546-5616, DOI: https://doi.org/10.2202/1546-5616.1002.

Export Citation

©2011 Walter de Gruyter GmbH & Co. KG, Berlin/Boston.Get Permission

Citing Articles

Here you can find all Crossref-listed publications in which this article is cited. If you would like to receive automatic email messages as soon as this article is cited in other publications, simply activate the “Citation Alert” on the top of this page.

[1]
B. Howaniec Honorata
Journal of Lviv Polytechnic National University. Series of Economics and Management Issues, 2017, Volume 4, Number 873(5), Page 111
[2]
Nick J.F. Bombaij and Marnik G. Dekimpe
International Journal of Research in Marketing, 2019
[4]
Julian Villanueva, Pradeep Bhardwaj, Yuxin Chen, and Sridhar Balasubramanian
SSRN Electronic Journal, 2005
[6]
Yacheng Sun and Dan Zhang
Management Science, 2019, Volume 65, Number 8, Page 3889
[7]
Julian Villanueva, Pradeep Bhardwaj, Sridhar Balasubramanian, and Yuxin Chen
Quantitative Marketing and Economics, 2007, Volume 5, Number 2, Page 99
[8]
Pyungyong Park, Donghan Kim, Sangmin Lee, and Jaehoon Whang
Sustainability, 2018, Volume 10, Number 11, Page 4255
[9]
Seema Gupta, Tanvi Gupta, and Shainesh G
IIMB Management Review, 2018
[10]
Laura Galguera, David Luna, and M. Paz Méndez
International Journal of Market Research, 2006, Volume 48, Number 4, Page 459
[12]
Els Breugelmans and Yuping Liu-Thompkins
Marketing Letters, 2017
[13]
Amirhossein Bazargan, Salma Karray, and Saeed Zolfaghari
European Journal of Operational Research, 2017
[14]
Usha Ramanathan, Nachiappan Subramanian, and Guy Parrott
International Journal of Operations & Production Management, 2017, Volume 37, Number 1, Page 105
[15]
Arthur W Allaway, Giles D'Souza, David Berkowitz, and Kyoungmi Kim
Journal of Marketing Analytics, 2014, Volume 2, Number 1, Page 18
[16]
Erin M. Steffes, B P S Murthi, and Ram C Rao
Journal of Financial Services Marketing, 2008, Volume 13, Number 3, Page 221
[17]
Andrés Musalem and Yogesh V. Joshi
Marketing Science, 2009, Volume 28, Number 3, Page 555
[18]
Matilda Dorotic, Dennis Fok, Peter C. Verhoef, and Tammo H. A. Bijmolt
Marketing Letters, 2011, Volume 22, Number 4, Page 341
[19]
Praveen K. Kopalle, Yacheng Sun, Scott A. Neslin, Baohong Sun, and Vanitha Swaminathan
Marketing Science, 2012, Volume 31, Number 2, Page 216
[20]
Marshall Freimer and Dan Horsky
Marketing Science, 2008, Volume 27, Number 5, Page 796
[21]
Lars Meyer-Waarden and Christophe Benavent
Journal of the Academy of Marketing Science, 2009, Volume 37, Number 3, Page 345
[22]
Po‐Tsang Chen and Hsin‐Hui Hu
International Journal of Contemporary Hospitality Management, 2010, Volume 22, Number 4, Page 535
[23]
Johan Anselmsson, Niklas Vestman Bondesson, and Ulf Johansson
Journal of Product & Brand Management, 2014, Volume 23, Number 2, Page 90
[24]
Serdar Sayman and Stephen J. Hoch
European Journal of Marketing, 2014, Volume 48, Number 3/4, Page 617
[25]
Nic S. Terblanche
Journal of Travel & Tourism Marketing, 2015, Volume 32, Number 3, Page 199
[26]
A. Gandomi and S. Zolfaghari
Omega, 2013, Volume 41, Number 4, Page 797
[27]
Ramon Caminal
Journal of Economics & Management Strategy, 2012, Volume 21, Number 2, Page 339
[28]
Jean Frisou and Hélène Yildiz
Journal of Retailing and Consumer Services, 2011, Volume 18, Number 1, Page 81
[29]
Jorna Leenheer, Harald J. van Heerde, Tammo H.A. Bijmolt, and Ale Smidts
International Journal of Research in Marketing, 2007, Volume 24, Number 1, Page 31
[30]
Matilda Dorotic, Tammo H.A. Bijmolt, and Peter C. Verhoef
International Journal of Management Reviews, 2012, Volume 14, Number 3, Page 217
[31]
B P S Murthi, Erin M Steffes, and Abdul A Rasheed
Journal of Financial Services Marketing, 2011, Volume 16, Number 1, Page 5
[32]
Lars Meyer-Waarden
Journal of Retailing, 2007, Volume 83, Number 2, Page 223
[33]
Lars Meyer‐Waarden
European Journal of Marketing, 2008, Volume 42, Number 1/2, Page 87
[34]
Mark S. Rosenbaum, Amy L. Ostrom, and Ronald Kuntze
Journal of Services Marketing, 2005, Volume 19, Number 4, Page 222

Comments (0)

Please log in or register to comment.
Log in