The effects of loyalty programs on markets

In this research paper the interaction between loyalty programs and switching costs will be analyzed. Furthermore the effects that loyalty programs have on switching costs, market prices and consumers will be researched. This will be done by setting up three different models, where two firms offer differentiated products to consumers which can be either high or low demand consumers. In this model the firms will introduce a ten plus one free loyalty program, where the high demand consumers are able to claim the reward. It is very likely that the loyalty programs induce switching costs. The results of the models show that the introduction of loyalty programs will raise market prices. Low demand consumers will always be worse off, while it might be possible that the benefits for the high demand consumers outweigh the increase in prices.