【公开学术报告】Why do Consumers Care about Loyalty Points?

Date & Time: 9:30-11:00am, Mon. 14^th, October 2019

Venue: Room 2101, Tongji Building A

Language: English

Speaker：Dr. Minshen LI (University of Pennsylvania, US)

ABSTRACT

I separately identify two mechanisms that jointly explain why consumers would care about loyalty points in the frequency rewards program, such as the “Collect X Points, Get A Reward” or “Buy X units, Get A Reward” type of program. One is an economic mechanism that incentivizes consumers through the price discounts that result from reward redemption. The other is a psychological mechanism that incentivizes consumers through the satisfaction as consumers achieve goals. In the economic mechanism, consumers endogenously choose the timing and amount of reward redemption. If consumers value discounts, it is likely that they would redeem, and they would get incentivized by potential future redemption. In the psychological mechanism, consumers implicitly treat extrinsic reward thresholds as goals and receive satisfaction upon goal achievement. Using the detailed records of credit card transactions, reward (voucher) generation, and cardholder redemption from a European credit card loyalty program, I develop and estimate a structural model of credit card spending that incorporates the two mechanisms. Using the model estimates and through counterfactual experiments, I find that the program increases credit card spending by ~6%, but the majority of the increase (~89%) is driven by the psychological mechanism. Given the relative effectiveness of the two mechanisms, I further show through counterfactual experiments that increasing points per dollar spent (points issuance ratios) would increase profits for the credit card company, while increasing the voucher face value would decrease profits. To generate win–win outcomes where profits increase without worsening consumer welfare, it is necessary to increase both points issuance ratios and the voucher face value.