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)
"Moral Hazard and Customer Loyalty Programs."
American Economic Journal: Microeconomics,
Asymmetric and Private Information