Abstract:
How do customer loyalty programs create switching costs? We estimate the demand effects of tier levels within a frequent flier program by exploiting discrete tier thresholds. We have two main results. First, members increase demand to reach a higher tier level just before the end of the calendar year when tier levels are determined, but do not manipulate demand in the months before. Second, using a fuzzy regression discontinuity design with running variables from earlier months, we show that upgraded members further increase their demand to enjoy the tier level benefits. Both effects are increasing in tier level. These findings are consistent with economic theories which point out that loyalty programs aim to create convex switching costs.
