DP3189 Introductory Offers in a Model of Strategic Competition

Author(s): Thomas Gehrig, Rune Stenbacka
Publication Date: February 2002
Keyword(s): competitiveness, introductory offers, price discrimination, switching costs
JEL(s): D43, L14
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3189

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.