Moral Hazard and Customer Loyalty Programs

Basso, Leonardo J.; Clements, Matthew T.; Ross, Thomas W.

doi:10.1257/mic.1.1.101

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American Economic Journal: Microeconomics: Vol. 1 No. 1 (February 2009)

AEJ: Micro Volume. 1, Issue 1 | left

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Moral Hazard and Customer Loyalty Programs

Article Citation

Basso, Leonardo J., Matthew T. Clements, and Thomas W. Ross. 2009. "Moral Hazard and Customer Loyalty Programs." American Economic Journal: Microeconomics, 1(1): 101-23.

DOI: 10.1257/mic.1.1.101

Abstract

Frequent-flier plans (FFPs) may be the most famous of customer loyalty programs, and there are similar schemes in other industries. We present a theory that models FFPs as efforts to exploit the agency relationship between employers (who pay for tickets) and employees (who book travel). FFPs "bribe" employees to book flights at higher prices. While a single airline offering an FFP has an advantage, competing FFPs can result in lower profits for airlines even while ticket prices rise. Thus, in contrast to switching-cost treatments of FFPs, we may observe prices and profits moving in opposite directions. (JEL D82, L93, M31)

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Authors

Basso, Leonardo J. (U Chile)
Clements, Matthew T. (St Edward's U)
Ross, Thomas W. (U British Columbia)

JEL Classifications

D82: Asymmetric and Private Information
L93: Air Transportation
M31: Marketing

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