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Review of Industrial Organization

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20.08.2018

Is There a Loyalty-Enhancing Effect of Retroactive Price-Reduction Schemes?

verfasst von: Lisa Bruttel

Erschienen in: Review of Industrial Organization | Ausgabe 3/2019

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Abstract

This paper presents an experiment on the effect of retroactive price-reduction schemes on buyers’ repeated purchase decisions. Such schemes promise buyers a reduced price for all units that are bought in a certain time frame if the total quantity that is purchased passes a given threshold. This study finds a loyalty-enhancing effect of retroactive price-reduction schemes only if the buyers ex-ante expected that entering into the scheme would maximize their monetary gain, but later learn that they should leave the scheme. Furthermore, the effect crucially hinges on the framing of the price reduction.

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The European Commission (2009) sometimes names such schemes “conditional” rebates. Also the terms “loyalty,” “all-units,” or “cliff” discount are frequently used in similar contexts—see, e.g., Salinger (2017).

For lists of examples, where such schemes are used—both in business-to-business relationships as well as in market interactions with final consumers—see Genchev and Mortimer (2017) or Morell et al. (2009). Steuer (2017) discusses the different effects of various conditional pricing schemes on retailers and final consumers.

A nice description of the behavior of a frequent flier addict is given in “The time is short, so he’s gotta fly,” Los Angeles Times, December 27, 2008. Carlsson and Loefgren (2006) attribute such behavior to habit formation.

For an overview of biases from standard economic predictions in human behavior, see, e.g., Rabin (1998).

British Airways (ECJ, Case C-95/04) used a retroactive price-reduction scheme when selling airline tickets via travel agencies.

EC, Case COMP/C-3/37.990

CFI, Case T-203/01

ECJ, Case C-549/10

ECJ, Case C-95/04

Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039, 1061 (8th Cir. 2000)

Virgin Atlantic Airways Ltd. v. British Airways PLC, 257 F.3d 256, 265 (2nd Cir. 2001)

Eisai, Inc. v. Sanofi Aventis U.S., LLC, 821 F.3d 394, 409 (3d Cir. 2016)

LePage’s Inc. v. 3M, 324 F. 3d 141 (3d Cir. 2003)

In the experimental instructions, the role of the buyer was framed as the one of a retailer that is buying the product from one of two sellers and reselling it to final consumers. This reflects that retroactive price-reduction schemes mainly occur in business-to-business relationships.

For simplicity, the calculation ignores the extremely small probability that seller 2 offers \(p_2^{low}\) less than twice during the 20 rounds.

Note that this does not necessarily imply that this strategy will finally turn out to be optimal after the price realizations of all 20 rounds are known.

More precisely, for \(r>1.36\) buyers switch from strategy 2 to strategy 1 already in round 8 if seller 2 offered the low price less than three times so far; for \(r>0.94\) they switch from strategy 1 to strategy 2 only if seller 2 offers the low price three times in the first three rounds.

See also the literature that (Holt and Laury 2002, fn. 9) cite.

In Potsdam, half of the data for the main treatments with \(p_2^{low}=35\) was collected. The behavior of the participants at the two different places was very similar.

An English translation of the instructions can be found in the “Appendix”.

In all price sequences that occurred during the experiments, seller 2 offered \(p_2^{low}\) at least two times during each trade phase.

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Titel: Is There a Loyalty-Enhancing Effect of Retroactive Price-Reduction Schemes?
verfasst von: Lisa Bruttel
Publikationsdatum: 20.08.2018
Verlag: Springer US
Erschienen in: Review of Industrial Organization / Ausgabe 3/2019
Print ISSN: 0889-938X
Elektronische ISSN: 1573-7160
DOI: https://doi.org/10.1007/s11151-018-9653-9

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