Sales and Consumer Lock-in

This paper examines the dynamically consistent price path for a new product monopolist, unable to commit to future prices, when consumers must incur setup costs of adopting the product. The authors find that setup costs give rise to a price path with introductory sales: along the path, periods of high prices, during which only locked-in or captive customers buy the product, alternate with sales (low-price) periods, during which new customers adopt the product. As the stock of captive customers increases over time, sales become less frequent; after the customer base reaches some critical level, no further sales take place. They show that the monopolist may hold a "sleeping patient" in which initial sales of the product are postponed to avoid locking into a high-pricing strategy that ignores new customers.