On the Value of Coalition Loyalty Programs

In recent years, an increasing number of firms have joined coalition loyalty programs (CLPs), where they collaborate with other firms in their loyalty program initiatives. However, CLPs remain less studied compared with proprietary loyalty programs (PLPs) offered by individual firms. This paper studies CLPs and compares them with PLPs using an analytical framework where n firms sell a nondurable product to infinitesimal heterogeneous customers over an infinite horizon. We analyze the design of CLPs and show that CLPs can significantly expand the range of market conditions under which offering reward programs is desirable. That is, firms have incentives to join CLPs, even when PLPs are ineffective, as CLPs enable more effective price discrimination. Our research also reveals the critical role of market composition in the effectiveness of CLPs—the optimal design of CLPs depends critically on the relative prominence of customer heterogeneity in shopping intensity and product valuation. Specifically, smaller CLPs are preferred in markets where customers’ heterogeneity in shopping intensity is more prominent than that in valuation. This also implies that larger CLPs are not always preferred, offering one explanation for the struggles of some CLPs in their expansion. We check the robustness of our results with extensions.

History: Anthony Dukes served as the senior editor.

Funding: Y. Liu was substantially supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region, China [Project No. PolyU15508722]. Y. Liu was also supported by a grant from NSFC [Grants 72293564/72293560]. Y. Wang was supported by the National Natural Science Foundation of China [Grant Number: 72542003] and the Faculty of Business, the Hong Kong Polytechnic University [Project ID: P0049231]. D. Zhang acknowledges with appreciation the research support provided by the Leeds School of Business at the University of Colorado Boulder, including funding through the MediaOne Professorship.

Supplemental Material: The online appendix is available at https://doi.org/10.1287/mksc.2024.1138.