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Competition policy often relies on the assumption of a rational consumer, although
other models may better account for people’s decision-making behavior.
In three experiments, we investigate the influence of loyalty rebates on consumers
based on the alternative Cumulative Prospect Theory (CPT). CPT predicts that
loyalty rebates could harm consumers by impeding rational switching from an incumbent
to an outside option (for example, 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
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