Loyalty Cards and Polymorphic Equilibria

Tyler Cowen:

Retail loyalty card programs, by Tyler Cowen: From some time ago, Kevin Drum reports:

I really loathe retail loyalty card programs.

These programs serve two functions. First, they are a form of price discrimination. Buyers who are willing to collect and show the cards pay lower prices while the "I can't be bothered with this ****" types pay higher prices.

Second, retail loyalty cards enforce partial collusion ex post in an oligopolistic setting. In other words, cards and frequent flyer programs "lock in" buyers to their favored firms. Once that lock-in is accomplished, all firms have weaker incentives to cut price to lure away buyers from their favorites. (The smarty-pants point is to note that firms have to give buyers a better deal upfront in anticipation of this lock-in but still if the company moves first with a non-negotiable offer it still can come out ahead and raise the P/MC ratio.)

The first function is usually welfare-improving, the second function usually is not. Overall you personally benefit from loyalty card programs if you don't mind holding the cards (you have a thick wallet) and you have a strongly favorite company/product anyway. In the latter case you are likely locked in anyway, so the strengthening of the lock-in effect doesn't so much restrict your freedom. This is tricky of course because you might miss out on preemptive price cuts from your favorite firm to keep you, since maybe they don't otherwise know how much you love their stuff. Still, I will stick with this mechanism as a plausible guess of the net effect.

You suffer from loyalty card programs if...you hate them. Not only do the programs and the smiling clerks bug you but you are the kind of person who ends up paying more. Which means you hate the programs even more. Which means...

But wait: the equilibrium seems to converge and so Kevin Drum's anger at retail loyalty card programs remains, in reality, quite low.

Grocery store cards don't lock you in as described above since you can get one for each store, and having one doesn't stop you from shopping for lower prices elsewhere (though occasionally they will give a discount or some other benefit for reaching an accumulated total which does have a lock-in effect). The lock-in is more like S&H or Blue Chip stamps in the old days if you remember those (you would get a certain number of stamps per dollar spent at, say, a grocery store, and the stamps would be collected in books, and the books could be redeemed for items in a catalogue, the more books, the better the item). At that time there were two competing strategies for retail stores, some stores offered stamps and others didn't, and both were successful side by side - one didn't seem to drive out the other - they seemed to coexist in equilibrium (they were polymorphic - the linked paper mentions the trading stamp example). But in the 1970s this changed and the stamps became less common, perhaps because inflation caused variation in the value of the stamps (?), and the programs fell out of favor. Since then, the trading stamp programs have been replaced by other gimmicks that lock customers into using a particular means of payment or shopping in a particular place.

But the two different types of strategies still appear to coexist, e.g some credit cards accumulate rewards and other don't, not all grocery stores require those stupid cards even if they aren't always easy to find, etc., and one reason for that could be strongly polarized customer preferences - Kevin Drum and anti Kevin Drum types - that support a partitioned market.

Comments

[Noni Mausa]

I am among the people who hate these cards. It is the sole reason that 10 years ago I stopped shopping for groceries at Safeway, 3 blocks from my home, and shifted to IGA, a mile away. (For much of this time I had no car, so I was serious about this.) An unexpected benefit: IGA turned out to be noticeably cheaper.

My chief objection to the card was to allowing some IT or advertising flunky to view my detailed purchasing behaviour thirty years down the road. Gave me the creeps.

Noni

[Nicolas]

To bother with this ****, you really need a low value of your time. My impression is also that some cumulative bonuses are ridiculously low. By the time the buyer realizes that he will have to spend a fortune in order to receive the gift, he doesn't want to loose his hard earned bonus so he pays cash for the gift.

[Juan]

Most of the time, at least with grocery stores, they just ask for your phone number in lieu of a physical card. I actually don't mind; I see it as:

(a) a sloppy way to price discriminate against the lazy;
(b) a cheap way to gather very detailed marketing data, and;
(c) a marketing technique to fool people into thinking they're getting a "deal."

Still, putting in my phone number at the checkout is usually worth the $5, right?

[Real Person from the Real World]

I love this posting! THANKS Prof Thoma. I have felt marketing and sales were out of bounds years ago, and are actually responsible for many problems the economy now faces. At one time, most ordinary items were priced with an ordinary markup. Now, the price is usually whatever the market will bear, and the proliferation of models makes it hard to compare.

But for a moment, take Microsoft. They have a near monopoly, and keep the price for their software as high as they can, for the deep pocketed corporate buyers. The actual software as originally developed is pretty much added on to, year after year, but the price never goes down, even on Windows 98, if you want to buy it. Meanwhile, they rant about software piracy while destroying US jobs, by imported labor. Their guestimates of the cost of piracy are, in my opinion, highly inflated, and yet everyone follows or dances to their tune. The recording industry blames MP3 files, and came up with copy restricting software, to interfere with your ability to copy items YOU PURCHASED. MP3 was merely a smaller file, that would make music easier to store and carry around, but the quality is still in the CD. I buy the music I like on CD, as do many people. The decline in sales is for different reasons.

Noka chocolate that appeared in this blog awhile back. Remember? The extremely overpriced chocolate that was reformatted Bonat chocolate marked up several hundred percent. While you may easily say, I won't buy that, the philosophical usage of marketing to overprice goods to cater to misperceptions of quality that buyers are psyched to in the overpaid groups, is endemic in the US, while those of us who are squeezed to produce the commissions and do the actually work are finding it harder to make ends meet.

[Nicholas Weaver]

Since they almost always accept home phone number, try
(local area code)-555-1212

[bakho]

I collect them. I just toss a keychain full of 50 cards on the belt and let the poor checker sort them out. There has to be a cost to the store for offering them. Everyone has one. Grocery, hardware, building supply, electric company, auto dealer, oil change, pharmacy, bookstore, coffee shop, library, sporting goods.......

I will stop when my Dentist starts offering loyalty cards.

[loyal patriot]

And Choicepoint will be hoovering up all that nice transactional data for incorporation into the GOP secret police database.

[Holly W.]

Kevin doesn't mention that many people object to these cards because of privacy concerns. You don't just get a card which identifies you as an anonymous regular customer; you have to fill out a form with your name, address, and telephone number. At the very least, your address has to be real so that they can send you a confirmation regarding your card.

So even if you give them a fake name, they really can still identify you with everything you purchase, and follow your tendencies and the changes in your lifestyle. CVS knows all about what OTC drugs you buy and what very personal products you use and has it on record; Stop & Shop knows everything about your eating habits and can likely tell you when you held your last dinner party based on your purchases.

My husband and I refuse to carry most loyalty cards because we don't think it's any store's business to know this much about us. I do carry a Petco card because I don't really care about my cat's privacy. :-)

[Holly W.]

P.S. I strenuously object to the price discrimination against people who are not willing to share personal information with the store, but it's amazing how little most people seem to consider their privacy to be worth.

[ScentOfViolets]

To bother with this ****, you really need a low value of your time. My impression is also that some cumulative bonuses are ridiculously low. By the time the buyer realizes that he will have to spend a fortune in order to receive the gift, he doesn't want to loose his hard earned bonus so he pays cash for the gift.

I dunno about that. Back in the day when I was Rocking Against Reagan, I was a two-pack-a-day smoker (cigarettes and marijuana and endless cups of coffee: cool. Alcohol and cocaine: not cool, the drugs of the exploited and the exploiter.) One of their gimmicks was the Marlboro Mile. If you collected enough coupons on the side of the pack, with each coupon rated 'five miles', you could redeem them for stuff like a fishing rod, or a short-wave radio, or a sleeping bag. I think the radio, which I ended up getting, was about '750 miles'. It took me less than three months.

The point, I guess, is that while it may have taken some time, it was 'slack time'. It only took an extra few seconds to tear off the coupon from the empty pack, a negligible fraction of the time it took to light up twenty cigarettes and dispose of the package (proto- and very strident Greens.) My mother was the same way with the S&H green stamps. If she was on the phone with one of her friends and just talking, she would keep her hands busy with the stamps. I suppose if you added up all the bits of time, it would be fairly substantial(maybe the age of the working Mom is what did for these programs.)

So is there a name for this type of phenomenon?

[Bruce Wilder]

Holly W: "CVS knows all about what OTC drugs you buy and what very personal products you use and has it on record; Stop & Shop knows everything about your eating habits and can likely tell you when you held your last dinner party based on your purchases"

Holly W: "amazing how little most people seem to consider their privacy to be worth"

The paranoid part of me wonders just how close the dedicated data miner is, to have a complete map of my life. Your name and address is associated with many things -- your supermarket card, your credit card, your cell phone, your Amazon account, your Netflix, and on and on. Once your data is out there . . . there are no effective barriers to putting it altogether, but the computational resources to put it together. Identity theft is already epidemic, so it is not like these corporations are being careful with the data.

Your cellphone is a somewhat imperfect GPS device -- if you carry it with you everywhere, your movements can be traced. Those ubiquitous advertising-tracking cookies on-line mean that outfits like Double-click can profile most of your on-line activities.

"Price discrimination" does not seem to cover the half of it. All of this data is being gathered with the expectation that it can be used . . . for something. Somehow, I don't think it will stop with printing coupons on the back of the supermarket cash register receipt or overwhelming your e-mail with spam.

[Alex Tolley]

In my neighborhood, Safeways' prices (with the card) are still higher than Nob Hill (Rayleigh) without a card.

I suspect that there is psychology involved too. Safeways always shows the regular price (which is marked up beyond normal) against the club card price. There must be some "ooh, this is cheap I'll buy more" thinking going on for some card carrying customers.

The irony of all this creepy fake discounting and data collection is that Safeway is not doing well in my area, partly because of poor staff and quality of goods, plus the rise of better stores like Trader Joe's and the incredibly successful Whole Foods. neither have cards, both offer great quality, although Whole Foods really knows how to mark up their vegetables to ridiculous levels - yet the store is always packed.

[donna]

I tend to think the cards are used mostly to collect shopping trends rather than invade privacy, so I don't worry much about them. They used to bother me a lot more. I use a few, but have switched more to shopping at stores that don't require them, and they do tend to have cheaper prices.

I have also stopped shopping at stores because I didn't have my card on me and refused to honor their loyalty price, even though they knew who I was. There's almost always a card behind the counter that the checker can use in a case like that, and when they wouldn't give me the discount, I simply stopped going there at all. I didn't have my address or phone number tied to the card, since most stores will give you a card without the info if you insist. So stores ought to be aware that these cards do cost them customers as well as potentially encouraging shopping there. I think they tend to be driving some shoppers away.

[robertdfeinman]

My local supermarket will override the lack of a card if you tell them you forgot yours.

I find that my savings are minimal, since the type if items I buy don't have promotions associated with them. It's only the high markup, over-processed items that are part of the game, no store offers specials on broccoli. The store also offers coupons at checkout tailored to what you just purchased. I seldom get any since Coke can't offer me one since I just purchased Pepsi, since I don't buy either.

As for knowing "everything" about us, accumulating data and making use of it are two different things. The ability to gather data far exceeds the ability to analyze it. I like to point to domestic spying as a good example. Despite the huge increase in such activity and the questionable legality of much of it, there hasn't been any improvement if catching "bad guys" is the desired result. Drugs are still flowing into this country at a prodigious rate and the only ones being caught are end users and low level dealers. Even the enhanced money tracking systems put in place don't seem to be doing much.

Stay away from the pop tarts and big business will lose interest in your shopping habits.

[Tom W]

I thought the article misunderstood the rationale behind these cards. It's not a form of price discrimination, since using the cards doesn't impose any labor or inconvenience; and it doesn't "lock in" a buyer to a particular store because it's easy to have cards for all the grocery stores.

I recall reading that the grocery stores sell information about their customer's buying habits. I think that's the main reason they have the cards.

[JeffF]

You can also just get a new card every time you go to the store, often the checkers will let you use it before you pretend to fill out their form, so you can skip the pretend form filling stage.

In a few stores I find the employees rebelling against the system. They will swipe a card for anyone who doesn't have one.

[JeffF]

"My chief objection to the card was to allowing some IT or advertising flunky to view my detailed purchasing behaviour thirty years down the road. Gave me the creeps."

Not using a store card isn't a necessary or effective strategy to prevent them from knowing your purchases.

The only effective strategy is to buy with cash only.

You can use their club cards with that strategy by filling out the form with false information, and perhaps sharing the secret phone number (which isn't yours) with others or switching cards occasionally.

The cash only is the really important part, if you buy with credit or check they know who you are.

I personally use a years old phone number that some other person has aparrantly signed up at safeway, but I often buy with a debit card, so they have the information necessary to track me pretty well.

[JeffF]

"At the very least, your address has to be real so that they can send you a confirmation regarding your card."

Do you actually need this confirmation, or are they just trying to trick you into giving a real address?

[vorpal]

I hate the cards. If you want to sell me something cheaper, sell it to me cheaper, don't annoy me with your BS plastic marketing scheme.

Enough already.

[VanL]

I disagree somewhat. Although this appears as price discrimination, I think that this is actually an overall price increase for all customers.

Stores have realized that there are two items of value that they can get from customers: 1) cash and 2) demographic data. In the case of loyalty card programs, the stores have decided that anyone that doesn't want to contribute their demographic data to the bottom line should pay a corresponding cash penalty.

[Noni Mausa]

I suspect that there is psychology involved too. Safeways always shows the regular price (which is marked up beyond normal) against the club card price. There must be some "ooh, this is cheap I'll buy more" thinking going on for some card carrying customers.

That was the final straw for me. The larger price posted in the aisles shows the "member price", with a much higher non-member price posted below it in tiny print. It took only a week or two of exposure to these labels before I swore off Safeway forever.

It might be fun to collect stories of why people permanently quit going to specific stores. I have Circuit City on my "never-ever" list, because of their shameless treatment of their staff a couple of years ago.

A friend has a charming habit of passing sentence on any business that has offended her -- they might get a three month, six month, or year sentence of not getting her custom. She keeps track of the timing to the day.

Sadly, the offending stores and restaurants do not know this is happening. How to actually give them effective feedback is a puzzle, because often they just can't be bothered.

Noni

[JDsg]

As an American expat, I have several of my old discount cards in my wallet (still) that I use to explain to my students what a loyalty program is like. In Asia, where I live, I've yet to see any grocery store chain in the several countries I've been to use an American-style loyalty card program (although a number of book store chains here use them). One grocery store chain here in S'pore does use a stamp program somewhat similar to what Mark described above (except that the reward is a money-off coupon instead of some product). To be honest, I've never understood the motivation of why the chain chose to use the stamp program instead of the loyalty cards because the amount of information the company can gather from using stamps is almost nothing in comparison to what it could get with the loyalty cards.

[Real Person from the Real World]

I have enjoyed reading the comments above, and I echo them. However, when people ask where the idea came from, there is a sad lack of memory. Anyone remember Plaid stamps. You glued the things to a book, and toted the books to a redemption center, when I was a kid. You did actually get items for them. Then there was Discover Card with the cash back, and later Shell with little dancing gas cans in the TV commercial. This kind of marketing crap has a long history, probably dating back to dish night during the depression. My ma had dishes from those days, and in the old UNTOUCHABLES shows, occasionally you will see a theater offering them in the background. Americans invented this goofy marketing crap. When Discover upped me to a premium card with a supposed higher percentage, but made it harder to get the reward, the futility of this all hit me, along with the ridiculous amounts you have to buy at clothing stores. I am mostly paying cash now, for food.

[Real Person from the Real World]

Death to credit card games!

[Michael Cain]

rdf: "As for knowing "everything" about us, accumulating data and making use of it are two different things. The ability to gather data far exceeds the ability to analyze it."

I used to feel this way. Then, several years ago, I had a chance to look at a program being operated by one of the largest long-distance phone companies. Each day, they examined every call made by every one of their customers and compared it to the historical pattern. The original purpose was fraud protection -- they could usually identify cases where PBX security had been compromised in order to steal service within 48 hours simply by detecting the change in calling pattern. Once the data collection system was in place, though, they found it "straightforward" to use the data to target every customer with service package offers, not just the large ones.

I have no doubt that the grocery chains have plenty of computing power available to answer any questions they like from the data collected by the loyalty programs. Nor that someone aggregating data from a variety of sources has sufficient computing power to answer such questions. Whether or not they can frame questions whose answers provide them (or me) with any real value is another matter entirely.

[Real Person from the Real World]

MIKE CAIN, YOU SAID IT! They may not all have the capacity to use the data they accumulate now, but don't under estimate them. ALSO, you know security video over IP can be used for marketing purposes also. That is the NEW TECH of passive data collection!

[Loyalty Member]

I hate all those cards as well. This company is trying to change that. One card for all programs. www.theloyaltycard.com