I want to start out with an insight so obvious that you’ll probably think, “Everyone knows that.” Only everyone doesn’t. The insight is this: If you offer discounts to your rival’s customers, it will cause your rival to fight to hold onto his customers, and he will do this by cutting prices. He will then take some of your customers away from you. In the end, you’ll get some of his customers, he’ll get some of yours, and you’ll both be selling at lower prices. If, on the other hand, you reward loyalty by offering a better deal to customers that have been with you for a while, you make your customers expensive to poach. Your rivals are discouraged from poaching them, and tend to respond in kind.
-- R. Preston McAfee, http://vita.mcafee.cc/PDF/PriceIsRight.pdf