Time-limited loyalty rewards

Most loyalty programs place tight restrictions on the timing of redemption of rewards. The goal of this paper is to understand the motivation behind these restrictions as well as their implications.I present an infinite-horizon model in which a monopolist can commit to sell the good to repeat customers at a reduced price. Such an option may or may not expire at a certain date. Consumer preferences are subject to temporary shocks, which implies that loyalty rewards can raise efficiency by contracting prior to private information arrival. I show that expiration dates enhance the effectiveness of loyalty programs by disciplining consumers, who otherwise excessively delay the redemption of rewards, and reduce the frequency of purchases. In addition, if firms can influence future regular prices then they may find it profitable to introduce loyalty programs that harm consumers.