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It has been long recognised in the economic industrial organisations literature that loyalty programs, such as frequent flyer programs, are mainly introduced by firms to impose switching costs on their customers. With respect to the commercial airline industry frequent flyer programs increase the switching cost of the less price sensitive business traveller, who is most likely to actively participate in such a program. This in turn enables an incumbent airline, such as Qantas in Australia , to price non-competitively to this class of travellers and potentially price below costs to the price sensitive leisure traveller, the only market segment available to a potential new entrant. Due to their use as a barrier to entry, these programs could potentially have detrimental effects on the Australian tourism industry in the long run. Hence an in-depth economic investigation of frequent flyer programs and their impact on competitive behaviour and flow-on effects to the Australian tourism industry is warranted.
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