To defeat others in the battle for market share, firms routinely launch different loyalty programs, deeply influencing customer purchasing decisions. The widespread availability of such programs imply competing firms face the challenge of disentangling the interactive impact to make informed pricing and promotional decisions, especially in competitive contexts. While much work has investigated loyalty programs in the context of a single loyalty program, this research develops an incentive-aligned, controlled, experimental paradigm to study how consumer purchase dynamics are shaped by the interplay of competing loyalty programs and the pricing and promotional strategies of firms, and hence exploring customers’ behavior while holding simultaneous membership in multiple loyalty programs.

In this experiment, participants made sequential choices between two competing airlines in a stylized frequent traveler task for which an optimal dynamic decision policy can be numerically computed. Each participant is randomly assigned to one of the eight markets that differ along three dimensions: (1) the loyalty programs, in terms of the point threshold needed for a free ticket; (2) the pricing strategy, in terms of the sale price levels for the competing firms; and (3) the promotion strategy, in terms of the sales promotions frequency.

The experiment leads to the following key findings. First, customers are not fully forward looking. Their decisions systematically deviate from the optimal, regardless of their awareness of the delayed, but larger, benefits from the loyalty programs to a certain extent. Further, it is especially difficult for participants to trade off the immediate benefits from sales promotions with delayed benefits resulting from loyalty programs, leaving customers worse off relative to under a myopic decision strategy that solely relies on observed prices. Second, it is observed that participants underappreciate the firm with a higher regular price but a lower redemption threshold. This tendency varies across individuals and market designs. Yet, in general, both the preferences of participants and their degree of optimality vary significantly across market designs. Third, considerable heterogeneity in the decision rules used by participants and in their ability to behave optimally are discovered. This indicates that participants, to a certain extent, are able to adapt their decision strategies to the competitive environment they face.

These findings further firms’ understanding of how consumers navigate different offerings from competing firms and can provide insights that firms could use to design effective loyalty programs, based on the actual behavior of customers within a competitive market. First, this study explains how a firm can balance its promotional strategy with its loyalty program under different market conditions and in the presence of consumer heterogeneity and firm competition. The research also identifies and quantifies the factors driving bounded rationality in consumer decision making, helping policy makers assist consumers in making better decisions and, thus, positively affecting consumer welfare. For simplicity, this study is limited to a market with two competing firms. In the future, it is expected that customer purchase decision making in even more complexed context involving loyalty programs in more firms will be examined.