Consumer Complacency and Grandfather Clauses

31 Pages Posted: 2 Nov 2015 Last revised: 16 Aug 2016

Brady Vaughan

Washington University in St. Louis

Aleksandr Yankelevich

Michigan State University - Quello Center

Date Written: October 31, 2015

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

Suggested Citation

Vaughan, Brady and Yankelevich, Aleksandr, Consumer Complacency and Grandfather Clauses (October 31, 2015). Quello Center Working Paper. Available at SSRN: https://ssrn.com/abstract=2684556 or http://dx.doi.org/10.2139/ssrn.2684556

Brady Vaughan

Washington University in St. Louis ( email )

Department of Economics
1 brookings drive
St. Louis, MO 63130
United States

Aleksandr Yankelevich (Contact Author)

Michigan State University - Quello Center ( email )

406 Communication Arts Building
404 Wilson Road
East Lansing, MI 48824-1212
United States

HOME PAGE: http://aleksyankelevich.com/

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