THE ROLE OF LOYALTY DISCOUNTS WHEN CONSUMERS ARE UNCERTAIN OF THE VALUE OF REPEAT PURCHASES

We develop a model of a market where regular customers of a firm with some monopoly power receive better service/lower prices. Loyalty discounts are shown to be the optimal strategy of a monopolist, if customers are uncertain of the value to them of a repeat purchase. We examine how this strategy is affected if consumers are risk averse, and distinguish between the cases where they have, and have not, access to credit markets.