The Economics of Multiproduct Loyalty Programs

Abstract

In this I paper I review the economic theory of loyalty discount programs.The emphasis is on recent developments, both in economic understandingand its application to recent cases. I begin with a taxonomy of loyalty programs within which the majority of litigated cases can be identified. A keyfeature of recent theorizing about loyalty programs is the importance of thedominant firm's uncontestable market, a market which in which entrantscannot compete, either because of insufficient capacity, or because in multiproduct cases, the entrant does not have the technology or expertise toproduce in some products supplied by the dominant firm. Other issues thatare discussed are the analogy between loyalty programs and price discrimination, which is a helpful one, and the less helpful analogy with predatory pricing theory and case law. I also assess the potential for "bright-line" tests for anticompetitive loyalty programs to emerge.