A Simple Theory of Vampire Attacks

Firms often find it valuable to lock in repeat consumers, and they often do so via loyalty programs such as frequent-flyer miles or discounts for returning consumers. We introduce a model of loyalty programs in the presence of competition and show that, surprisingly, such programs result in higher prices for all consumers in equilibrium.However, competitors may also find it valuable to identify repeat consumers of other firms and convince them to switch; such efforts are called “vampire attacks” – and are particularly easy to execute in the context of Web3 platforms that record their transactions on a public blockchain ledger. We show that vampire attacks can facilitate price competition; this implies that Web3 platforms face competitive pressures where more traditional firms with loyalty programs may not