Intrinsic and Induced State Dependence in Frequency Reward Programs: A Dynamic Structural Examination
We develop a comprehensive dynamic structural model of purchase behavior that incorporates response to reward, state dependence and forward-looking behavior and consumer heterogeneity. We apply the model to a unique panel data set on a buy-ten-get-one reward program administered by a tea cafe chain. We find that customers are sensitive to intrinsic state dependence with a great deal of heterogeneity in the response levels, whereas only the moderately frequent customers are sensitive to induced state dependence. The results also reveal a dynamic interaction effect between the induced and intrinsic state dependence, highlighting a multi-fold effect of the reward program. Counterfactual studies are performed to analyze the value of the reward program and the profit implications of structural changes to the program.
Huseyin Karaca, Lakshman Krishnamurthi, Yuxin Chen
Karaca, Huseyin, Lakshman Krishnamurthi, and Yuxin Chen. 2018. Intrinsic and Induced State Dependence in Frequency Reward Programs: A Dynamic Structural Examination.