Customers’ Response to Advantaged Grandfather Clause: a Natural Experiment

Abstract

Grandfather clause is the practice of exempting existing consumers from a price hike or allowing them to continue consuming a discontinued service. We examine the effect of grandfather clause on subscribers’ behavior in video-on-demand industry. Taking advantage of a policy change event as our identification strategy, we found that (1) grandfather clause extends subscribers’ subscription duration; (2) subscribers are more likely to keep their subscription during low activeness periods; and (3) subscribers behave reciprocally to firms’ kindness by contributing more contents (e.g. subtitles and reviews). This paper contributes to the literature in behavior-based pricing and customer relationship management area. We provide empirical support to providing lower price to existing subscribers, meanwhile, we highlight the importance of communicating value to customers.