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  3. American Economic Journal: Microeconomics
  4. February 2009
  5. Moral Hazard and Customer Loyalty Programs

Moral Hazard and Customer Loyalty Programs

  • Leonardo J. Basso
  • Matthew T. Clements
  • Thomas W. Ross
American Economic Journal: Microeconomics
vol. 1, no. 1, February 2009
(pp. 101-23)
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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)

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

JEL Classification

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