Do frequency reward programs create switching costs? A dynamic structural analysis of demand in a reward program

This paper examines a common assertion that customers in reward programs become "locked in" as they accumulate credits toward earning a reward. We define a measure of switching costs and use a dynamic structural model of demand in a reward program to illustrate that frequent customers' purchase incentives are practically invariant to the number of credits. In our empirical example, these customers comprise over 80% of all rewards and over two-thirds of all purchases. Less frequent customers may face substantial switching costs when close to a reward, but rarely reach this state.