Consumer Complacency and Grandfather Clauses

Abstract

We examine firms' motivations for implementing grandfather clauses that allow certain consumers to continue access to a service at a favorable, but no longer available price. We find that when consumers are fully cognizant of their valuations for available product alternatives, firms are typically better off offering all potential consumers the optimal uniform price. However, if grandfathered consumers are made complacent, failing to reevaluate the service over time, grandfather clauses may permit firms to profitably price discriminate between early adopters and new consumers in exchange for forfeiting the right to optimally set prices for early adopters.

Keywords: Customer Recognition, Duopoly Competition, Grandfather Clause, Price Discrimination, Switching

JEL Classification: D43, L13, L15