Consumer Preferences & Loyalty DiscountsThe Case of UK Grocery Retail

This thesis re-examines a common assumption entering theoretical models of endogenous switching costs. Through a discrete choice experiment we test the hypothesis that consumers are heterogeneous in the way they respond when firms offer repeat purchase discounts through loyalty schemes. The assumption itself is important because in practice, heterogeneity in consumer switching costs holds implications for firms’ strategies and their resultant market shares. This thesis presents a flexible methodology for a discrete choice experiment inspired by the UK groceries sector using novel techniques in D-efficient experimental survey design. When fitting the data to the mixed logit model, we find that consumers’ taste varies significantly more for loyalty schemes than for any of the other variables entering the model. The results of our discrete choice experiment show that consumers differ significantly in how they respond to repeat purchase discount strategies. On this basis, it is likely that theoretical models of loyalty schemes overemphasise the effects of loyalty schemes on price competition. We argue instead, that a repeat purchase discount strategy will not result in a unilateral increase in artificial switching costs for all consumers in the market. We propose that forward looking firms are likely to recognise the limitations to scheme effectiveness due to heterogeneity in switching costs and will be more likely to invest in their customer base through future lower prices. Therefore from a competition policy perspective, we argue that in a fast paced retail market for non-durable goods, loyalty schemes are more likely to intensify competition for the benefit of consumers rather than act as an exclusionary device.