Working Paper: CEPR ID: DP3189
Authors: Thomas Gehrig; Rune Stenbacka
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.
Keywords: Competitiveness; Introductory Offers; Price Discrimination; Switching Costs
JEL Codes: D43; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Switching costs (D23) | Emergence of introductory offers (D40) |
| Switching costs (D23) | Industry profits (D33) |
| Emergence of introductory offers (D40) | Industry profits (D33) |
| Competitive dynamics created by switching costs (D43) | Firms' preferences (D21) |