Loyalty Programs, Soft Monopolies, and Taxpayers

Most analysts had thought that American’s frequent flier program became moot as soon as Delta and the other airlines copied it. But in fact, the authors argue, the effect of such programs is that customers are less likely to switch from their preferred airline to another in response to a price cut. Thus, thanks to American’s AAdvantage program, Delta has less incentive to lower its fares; thanks to Delta’s SkyMilers, American is less likely to lower its fares. And, still more joy, both airlines can even start to raise fares, knowing that customers are less likely to leave in the event of a price increase. In essence, by atomizing individual consumers, loyalty programs create soft, micromonopolies on the market to individuals. The result for the airlines is “greater price stability,” the authors say, by which they mean higher faires. They happily chalk it up as a “win-win” for American and Delta — never mind the fact that, according to their own analysis, consumers collectively end up paying more in exchange for having expressed their individual loyalties.

Of course, as every business traveler knows, the airpline programs work in no small measure because businesses pay the fares while travelers collect the miles. “So are bosses the losers?” the game theorists ask. “Not necessarily. Frequent-flyer miles are a tax-free way for companies to comepensate employees who undertake a lot of business travel.” Thus, according to experts, in the profoundly unlikely event that an extra tens of thousands of dollars in business class fares is your company’s way of gifting you a once-a-year trip to Hawaii, then it is the taxpayer who foots the bill! So it’s a win-win all around — except for those who pay taxes.

— Matthew Stewart, “The Management Myth,” p 232-233

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