Retail loyalty card programs

From some time ago, Kevin Drum reports:

I really loathe retail loyalty card programs. 

These programs serve two functions.  First, they are a form of price discrimination.  Buyers who are willing to collect and show the cards pay lower prices while the "I can’t be bothered with this ****" types pay higher prices. 

Second, retail loyalty cards enforce partial collusion ex post in an oligopolistic setting.  In other words, cards and frequent flyer programs "lock in" buyers to their favored firms.  Once that lock-in is accomplished, all firms have weaker incentives to cut price to lure away buyers from their favorites.  (The smarty-pants point is to note that firms have to give buyers a better deal upfront in anticipation of this lock-in but still if the company moves first with a non-negotiable offer it still can come out ahead and raise the P/MC ratio.)

The first function is usually welfare-improving, the second function usually is not.  Overall you personally benefit from loyalty card programs if you don’t mind holding the cards (you have a thick wallet) and you have a strongly favorite company/product anyway.  In the latter case you are likely locked in anyway, so the strengthening of the lock-in effect doesn’t so much restrict your freedom.  This is tricky of course because you might miss out on preemptive price cuts from your favorite firm to keep you, since maybe they don’t otherwise know how much you love their stuff.  Still, I will stick with this mechanism as a plausible guess of the net effect.

You suffer from loyalty card programs if…you hate them.  Not only do the programs and the smiling clerks bug you but you are the kind of person who ends up paying more.  Which means you hate the programs even more.  Which means…

But wait: the equilibrium seems to converge and so Kevin Drum’s anger at retail loyalty card programs remains, in reality, quite low. 


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