Discussion Paper Details

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Title: Introductory Offers in a Model of Strategic Competition

Author(s): Thomas Gehrig and Rune Stenbacka

Publication Date: February 2002

Keyword(s): competitiveness, introductory offers, price discrimination and switching costs

Programme Area(s): Industrial Organization

Abstract: We show how introductory offers emerge endogenously under conditions of competition in markets with switching costs. In a standard Hotelling model we find the combination of switching costs and introductory discounts to reduce industry profits relative to industries without switching costs, in which introductory offers do not emerge. Thus, our analysis offers a formalized argument for the policy conclusion that the strategic use of introductory offers should be promoted, not banned, in environments where firms are able to discriminate across different vintages of customers.

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Bibliographic Reference

Gehrig, T and Stenbacka, R. 2002. 'Introductory Offers in a Model of Strategic Competition'. London, Centre for Economic Policy Research.