• Choose a category
• All
• Classic-Fiction

By Root 837 0

York to Chicago on American Airlines is the same to everyone—member of American’s AAdvantage program or not. But the trip is more valuable to AAdvantage members than to nonmembers because it brings them that much closer to a free ticket to Hawaii. So by delivering its loyal customers more value for the same price, American is, in effect, charging them less than others for that trip from New York to Chicago. Who faces the higher effective price? Among others, all the people loyal to United Airlines: United loyalists won’t value AAdvantage miles as much as American loyalists do. That means United now has some room to firm up its own prices without losing traffic, and that gives American some more breathing room, which in turn helps United, and so on. American and United enjoy the same win-win pricing dynamic as GM and Ford do.

There’s clearly a close connection between a rebate program like the GM Card and the loyalty programs, such as AAdvantage, discussed in the previous chapter. That’s to be expected. Both types of programs are rules—essentially unilateral contracts with customers, guaranteeing them a discount. Moreover, the way they affect industry pricing dynamics is the same. There’s one major difference between the two types of programs. A loyalty program like AAdvantage rewards customers in kind rather than in cash and, in so doing, increases the size of the pie. By contrast, the GM Card rewards people in dollars and so doesn’t increase GM’s added value.20 While it’s better to have a program that rewards people in kind rather than cash, as we’ve just seen with the GM Card, cash can do nicely, too.

There’s no reason why other businesses shouldn’t follow GM’s lead and change the rules by starting their own credit-card rebate programs. Rebate programs are most useful to businesses that sell big-ticket, infrequently purchased items. It isn’t feasible for these businesses to reward customers in kind. Banks can’t give out free mortgages, but they could offer rebates off mortgage points. Similarly, real-estate brokers can’t give away houses, but they could offer rebates off their commissions. Indeed, anyone selling a big-ticket item might consider having a rebate program.

There’s a final, ironic twist to the GM Card story. It appears that GM got it right for the wrong reason. In an interview, Hank Weed, managing director of the GM Card program, explained that the card was designed to help GM build share through the “conquest” of prospective Ford buyers and others.21 We believe that the conquest effect was modest, at best. The GM Card was always going to be most attractive to GM’s own customer base and not that attractive to prospective Ford buyers. This was even more true once Ford started a card program of its own. At that point, prospective Ford buyers had virtually no reason to acquire a GM Card. Moreover, how could GM have expected its program not to be imitated? There was nothing proprietary about it. So it seems to us that the real effect of the GM Card was quite different: it improved the pricing dynamics in the car industry. In this, it was a runaway success.

Rebate Program

PROS

1. Allows you to charge your own customers low prices without threatening your rival’s customer base.

2. Encourages customers—even price shoppers—to become loyal.

CONS

1. In rewarding loyalty in cash rather than kind, doesn’t raise your added value.

2. Is ineffective on small-ticket items.

4. Government Rules

The government has the power to make many rules of the game. The government makes tax laws, patent laws, minimum wage laws, superfund cleanup laws, and many, many other laws. These laws govern transactions among all the players in the economy.

In addition to more direct regulation, the government makes the rules that say what rules other players can make. It makes the “meta-rules” of the game, if you like. This is one role of antitrust laws, which determine, among other things, what types of contracts are legal and what types are not. To our knowledge, none of the contracts we’ve discussed