Blockbuster, a once mighty video vendor that filed for bankruptcy protection in 2010 and is now owned by Dish Network Corp, said that a customer who switches to one of its "total access" plans to receive DVDs by mail will receive a 30-day free trial.
Shares of Netflix, which had headed downward since the start of trading, extended losses after the news and closed down 4.05 percent at $286.62 on the Nasdaq.
In a statement, Blockbuster called Netflix's price increase "shocking" and said it would "rescue upset Netflix customers." It also launched a new website around the promotion with a banner saying "Netflix customers, say hello to Blockbuster."
In response, Netflix spokesman said its plans still offer better prices that Blockbuster's service.
"I understand Blockbuster's offer is for $9.99 for 1 DVD at a time. The same offer from Netflix is $7.99 a month. Why would someone change?"
Wedbush Securities analyst Michael Pachter said he doubts that a significant number of Netflix customers will defect to Blockbuster but that the news may have sent Netflix shares lower on Thursday.
"Today's price action shows how Netflix is priced for perfection. Any chink in their armor makes the stock move," he said.
Droves of subscribers complained on Netflix's official blog this week with many threatening to cancel subscriptions after the video service raised prices by up to 60 percent for users of both its streaming and DVD-mail service.
Dish shares fell 2.1 percent on the Nasdaq.
(Reporting by Liana B. Baker; Editing by Bernard Orr and Steve Orlofsky)