A study into loyalty-inducing programmes which do not induce loyalty

Motivated by the lack of evidence showing that loyalty programmes are successful in inducing switching costs, this paper offers an alternative rationale for their ubiquity. In a setting where two duopolists compete over price and over the value of a discount to hand to repeat-buyers, it is shown that though customers do not become locked-in, the firms will nevertheless find it in their interest to reward repeat buyers. Doing so weakens the competitive aggressiveness of its rivals. It is shown that prices, the discount offered by the firms and firms' profits are all increasing with the share of the frequent consumers.