CAIE A-Level Economics 7.8 Firm Objectives and Policies Question Bank

Loyalty and consumer behaviour

Consumer loyalty can be shown in different ways. It may be through:
- customer reward schemes (e.g. loyalty cards) that offer discounts based on the amount spent with a specific retailer
- emotional loyalty where customers prefer a particular brand that they always buy
- monopoly loyalty where there is no alternative to the retailer or brand.

Supermarkets try to attract customers by using loyalty cards that give promotions and price reductions to those who have a card. The cards also help the supermarket build barriers between retailers to gain a marketing advantage.

When consumers are collecting points towards a particular goal, the loyalty card may hinder free competition and prevent switching between brands. However, sometimes the discounts used by the scheme may be confusing and make it difficult for the consumer to compare prices.

There are risks for the retailers too. The loyalty cards require substantial investment to run - one supermarket put the cost at US $\$ 60 \mathrm{~m}$ a year. These costs could well result in higher prices for the consumer.

But how do loyalty card schemes fit into the context of the way in which consumers make choices? A research report found that in one country where $70 \%$ of consumers had a loyalty card, only about 10\% were loyal to one particular card.

It has been found that when choosing to buy groceries consumers look for one-stop shopping $(43 \%)$, good service ( $22 \%$ ), price ( $18 \%$ ), the availability of a coffee shop ( $12 \%$ ) and help with packing (6\%). Loyalty cards come below these.

Companies use loyalty cards to gather data on customers and their buying preferences. They then direct future offers to consumer wishes in specific promotions both online and in the mail. Loyalty schemes are thus sometimes less about loyalty and more about understanding customers' wants.

The economic model of consumer behaviour using indifference curves assumes that consumers conduct research and buy products and services in a rational way. Many purchases, however, are based on habit and consumer research is imprecise. When the consumer has a low involvement in research or a low emotional attachment to the product, there will be little loyalty.

Source: RSA Journal

A firm has set a low price in the short run to act as a barrier to entry for new firms entering the market.

This is an example of which pricing strategy?

A firm is operating at a level of output which corresponds to the point where MR=0.
What objective is the firm achieving?

A bus company has a monopoly and specialises in long-distance travel. It initially sells its tickets to customers one month in advance of the journey. As the departure date approaches, the price of a ticket increases.

Which kind of pricing policy does the bus company operate?

In the diagram
M C= marginal cost; A C= average cost; M R= marginal revenue; A R= average revenue.

What will be the output of a profit-maximising firm whose cost and revenue functions are shown above?