Time-limited Loyalty Rewards

Abstract

Most loyalty programs place tight restrictions on the timing of redemption of rewards. The goal of this paper is to understand the motivation behind these restrictions as well as its implications. I present an infinite-horizon model in which a monopolist can commit to sell the good to repeat customers at a reduced price. Such an option may or may not expire at a certain date. Consumer preferences are subject to temporary shocks, which implies that loyalty rewards may increase efficiency by fostering consumer participation. On the one hand, lifting time restrictions, raises the value of the rewards for consumers by allowing them to engage in intertemporal substitution. On the other hand, it induces consumers to excessively delay the redemption of rewards, and hence all future purchases. In most of the scenarios examined in this paper the second effect dominates and hence time-limited rewards are adopted. The interests of consumers and the firm tend to be aligned and hence there is little room for public intervention exclusively concerned with the time dimension of rewards.