The Times Australia
The Times World News

.
The Times Real Estate

.

Loyalty programs may limit competition, and they could be pushing prices up for everyone

  • Written by Alexandru Nichifor, Associate Professor, Faculty of Business and Economics, University of Melbourne, The University of Melbourne
Loyalty programs may limit competition, and they could be pushing prices up for everyone

Loyalty programs enable firms to offer significantly lower prices to some of their customers. You’d think this would encourage strong competition.

But that isn’t always what actually happens. New research[1] shows that paradoxically, by changing the way companies target customers, loyalty programs can sometimes reduce price competition. The research also points to solutions.

A win-win proposition?

Joining a loyalty program is supposed to be a win-win. You – the customer – get to enjoy perks and discounts, while the company gains useful commercial insights and builds brand allegiance.

Read more: What do TikTok, Bunnings, eBay and Netflix have in common? They’re all hyper-collectors[2]

For example, a hotel chain loyalty program might reward travellers for frequent stays, with points redeemable for future bookings, upgrades or other benefits. The hotel chain, in turn, records and analyses how you spend money and encourages you to stay with them again.

a flybuys card and an everyday rewards card
Australia’s two major supermarkets have well-established loyalty programs. GiselleA/Shutterstock[3]

Such programs are commonplace across many industries – appearing everywhere from travel and accommodation to supermarket or petrol retailing. But they are increasingly coming under scrutiny.

In 2019, the Australian Competition and Consumer Commission (ACCC) cautioned[4] consumers about the sheer volume of personal data collected when participating in a loyalty program, and what companies can do with it.

Hidden costs – such as having to pay a redemption fee on rewards or losing benefits when points expire – are another way these schemes can harm consumers.

But a larger question – how loyalty programs impact consumers overall – remains difficult to settle, because their effect on competitiveness is unclear. As the ACCC’s final report[5] notes, on the one hand:

Loyalty schemes can have pro-competitive effects and intensify competition between rivals leading to competing loyalty discounts and lower prices for consumers.

But on the other hand:

Loyalty schemes can also reduce the flexibility of consumers’ buying patterns and responsiveness to competing offers, which may reduce competition.

How a two-speed price system can hurt everyone

A new economic theory research working paper[6], coauthored by one of us (Kominers), suggests that on competitive grounds alone, loyalty programs can sometimes harm all consumers – both ordinary shoppers and the program’s own members.

price tag showing normal price of 5.49 and a member price of 3.99
Membership systems allow retailers to charge non-members a less competitive base price, earning a higher margin. ZikG/Shutterstock[7]

It’s easy to see how the ordinary shopper can be worse off. Since a firm’s loyalty program enables it to offer discounted prices to its members, the firm can raise the base prices it offers to everyone else. Those not participating in the program pay more than they otherwise would have, and the firm can respond by saying “join our program!” instead of having to lower its price.

But sometimes, even the program’s own members can end up worse off.

When a given customer’s loyalty status is not visible to a firm’s competitors – as is the case in many loyalty programs today – it’s hard for those competitors to identify them and entice them to switch.

The main way to compete for those customers becomes to lower the base price for everyone, but this means missing out on the high base margins achieved through the existence of your own loyalty program – remember, having a loyalty program means you can charge non-members more.

It’s often more profitable for firms to just maintain high base prices. This, in turn, reduces overall price competition for loyal customers, so firms can raise prices for them, too.

What’s the solution?

Despite these effects on competition, loyalty programs still offer benefits for consumers and an opportunity for brands to form closer relationships with them.

So, how do we preserve these benefits while enabling price competition? The research suggests an answer: making a customer’s loyalty status verifiable, transparent and portable across firms. This would make it possible for firms to tailor offers for their competitors’ loyal customers.

Read more: You can't trust the price-comparison market, as iSelect's $8.5 million fine shows[8]

This is already happening in the market for retail electricity. While there aren’t loyalty programs there per se, a consumer’s energy consumption profile, which could be used by a competitor to calibrate a personalised offer, is known only to their current electricity supplier.

To address this, in 2015, the Victorian government launched a program[9] encouraging households to compare energy offers. This process involved first revealing a customer’s energy consumption profile to the market, and then asking retailers to compete via personalised offers.

By opening information that might have otherwise been hidden to the broader market, this approach enabled firms to compete for each other’s top customers, in a way that could be emulated for loyalty programs.

KLM and Etihad planes parked side by side at an airport
Some airlines offer ‘status match’ policies which allow customers to move between competitors’ loyalty programs while maintaining their status level. Skycolors/Shutterstock[10]

Such systems in the private sector could build upon “status match[11]” policies at airlines. These allow direct transfer of loyalty status, but currently rely on a lengthy, individual-level verification process.

For example, a design paradigm known as “Web3[12]” – where customer transactions and loyalty statuses are recorded on public, shared blockchain ledgers – offers a way to make loyalty transparent across the market.

This would enable an enhanced, decentralised version of status match: a firm could use blockchain records to verifiably identify who its competitors’ loyal customers are, and directly incentivise them to switch.

Both startups and established firms have experimented with building such systems.

What next?

New academic research helps us model and better understand when loyalty programs could be weakening supply side competition and undermining consumer welfare.

A neat universal solution may prove elusive. But targeted government or industry interventions – centred on increasing the transparency of a customer’s loyalty status and letting them move it between firms – could help level the playing field between firms and consumers.

References

  1. ^ New research (papers.ssrn.com)
  2. ^ What do TikTok, Bunnings, eBay and Netflix have in common? They’re all hyper-collectors (theconversation.com)
  3. ^ GiselleA/Shutterstock (www.shutterstock.com)
  4. ^ cautioned (www.accc.gov.au)
  5. ^ final report (www.accc.gov.au)
  6. ^ working paper (papers.ssrn.com)
  7. ^ ZikG/Shutterstock (www.shutterstock.com)
  8. ^ You can't trust the price-comparison market, as iSelect's $8.5 million fine shows (theconversation.com)
  9. ^ program (compare.energy.vic.gov.au)
  10. ^ Skycolors/Shutterstock (www.shutterstock.com)
  11. ^ status match (thepointsguy.com)
  12. ^ Web3 (hbr.org)

Read more https://theconversation.com/loyalty-programs-may-limit-competition-and-they-could-be-pushing-prices-up-for-everyone-220669

The Times Features

The Benefits of Animal-Assisted Speech Therapy For Children

Speech therapy has long been a standard for supporting children’s communication and emotional development. But what happens when you introduce a furry friend into the process? Th...

The Hidden Dangers of Blocked Drains and the Ultimate Solution for a Hassle-Free Home

Drain blockages are a big hassle to every homeowner and business owner alike. Whether it is a sink in the kitchen or bathroom, a clogged toilet, or a foul smell circulating aroun...

Understanding the Dangers of Ignoring a Gas Leak

Gas leaks are silent threats lurking within both homes and workplaces. A gas leak occurs when natural gas or any other gaseous substance escapes from a pipeline or containment. T...

Can You Sell Your House Privately in Queensland? Here’s How

Selling a house privately in Queensland is entirely possible and can be a cost-effective alternative to using a real estate agent. While agents provide valuable expertise, their co...

Itinerary to Maximize Your Two-Week Adventure in Vietnam and Cambodia

Two weeks may not seem like much, but it’s just the right time for travelers to explore the best of Vietnam and Cambodia. From the bustling streets of Hanoi to the magnificent te...

How to Protect Your Garden Trees from Wind Damage in Australia

In Australia's expansive landscape, garden trees hold noteworthy significance. They not only enhance the aesthetic appeal of our homes but also play an integral role in the local...

Times Magazine

CWU Assistive Tech Hub is Changing Lives: Win a Free Rollator Walker This Easter!

🌟 Mobility. Independence. Community. All in One. This Easter, the CWU Assistive Tech Hub is pleased to support the Banyule community by giving away a rollator walker. The giveaway will take place during the Macleod Village Easter Egg Hunt & Ma...

"Eternal Nurture" by Cara Barilla: A Timeless Collection of Wisdom and Healing

Renowned Sydney-born author and educator Cara Barilla has released her latest book, Eternal Nurture, a profound collection of inspirational quotes designed to support mindfulness, emotional healing, and personal growth. With a deep commitment to ...

How AI-Driven SEO Enhancements Can Improve Headless CMS Content Visibility

Whereas SEO (search engine optimization) is critical in the digital landscape for making connections to content, much of it is still done manually keyword research, metatags, final tweaks at publication requiring a human element that takes extensiv...

Crypto Expert John Fenga Reveals How Blockchain is Revolutionising Charity

One of the most persistent challenges in the charity sector is trust. Donors often wonder whether their contributions are being used effectively or if overhead costs consume a significant portion. Traditional fundraising methods can be opaque, with...

Navigating Parenting Arrangements in Australia: A Legal Guide for Parents

Understanding Parenting Arrangements in Australia. Child custody disputes are often one of the most emotionally charged aspects of separation or divorce. Parents naturally want what is best for their children, but the legal process of determining ...

Blocky Adventures: A Minecraft Movie Celebration for Your Wrist

The Minecraft movie is almost here—and it’s time to get excited! With the film set to hit theaters on April 4, 2025, fans have a brand-new reason to celebrate. To honor the upcoming blockbuster, watchfaces.co has released a special Minecraft-inspir...

LayBy Shopping