"American Express Retires The Classic Green Card: Yielding to Demand for Miles, It Will Offer More Rewards, But Debit-Card Threat Looms", WSJ, September 24, 2002.
"Membership Rewards enrollees spend four times as much on their AmEx cards as cardholders who don't get points. So in an effort to entice all its cardholders to spend more liberally, the company decided to put every charge-card customer in its Rewards program." Are new Rewards program members likely to spend as much as existing program members?
Most challenging questions: Isn't AmEx better off under its old system offering two options (Rewards program and non-Rewards) since then it can price discriminate (through self-selection)? Explain why the following is possible: "As long as members are given a choice as to whether to be Rewards program members, the Rewards program will always be unprofitable (even with zero fixed costs). But if all members are automatically enrolled in Rewards, then the program will be profitable."
[LINK: demand substitutes (1,2), network externalities (7), self-selection schemes (11), moral hazard & adverse selection (18,19) & as source of "market failure" (19)]
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