01728nas a2200121 4500008004100000245007600041210006900117520128600186100002201472700002301494700002501517856006401542 2009 eng d00aSticky Rebates: Target Rebates Induce Non-Rational Loyalty in Consumers0 aSticky Rebates Target Rebates Induce NonRational Loyalty in Cons3 a

Competition policy often relies on the assumption of a rational consumer, although other
models may better account for people’s decision behavior. In three experiments, we
investigate the influence of loyalty rebates on consumers based on the alternative Cumulative
Prospect Theory (CPT), both theoretically and experimentally. CPT predicts that loyalty
rebates could harm consumers by impeding rational switching from an incumbent to an
outside option (e.g., a market entrant). In a repeated trading task, participants decided whether
or not to enter a loyalty rebate scheme and to continue buying within that scheme. Meeting
the condition triggering the rebate was uncertain. Loyalty rebates considerably reduced the
likelihood that participants switched to a higher-payoff outside option later. We conclude that
loyalty rebates may inflict substantial harm on consumers and may have an underestimated
potential to foreclose consumer markets. Our findings therefore provide additional arguments
why a dominant firm using target rebates may monopolize a market or abuse its market
power. They also provide arguments why target rebates may raise consumer protection
concerns.

1 aMorell, Alexander1 aGlöckner, Andreas1 aTowfigh, Emanuel, V. uhttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=1443783