Points Mechanisms and Rewards Programs

I study points programs, such as frequent flyer and other rewards programs, as a revenue management tool. I develop a two-period contracting model where a capacity-constrained firm faces consumers who privately learn their valuations over time. The firm cannot commit to long-term contracts, but it can commit to allocate any unsold capacity through a points program. This points scheme creates an endogenous and type-dependent outside option for consumers, which generates novel incentives in the firm's pricing problem. It induces the firm to screen less ex interim, and to offer lower equilibrium prices, reversing the intuition of demand cannibalization