Consumer Inertia and Market Power

58 Pages Posted: 6 May 2019

See all articles by Alexander MacKay

Alexander MacKay

Harvard Business School

Marc Remer

Swarthmore College - Economics Department

Date Written: April 29, 2019

Abstract

We study the pricing decision of firms in the presence of consumer inertia. Inertia can arise from habit formation, brand loyalty, switching costs, or search, and it has important implications for the interpretation of equilibrium outcomes and counterfactual analysis. In particular, consumer inertia affects the scope of market power. We show that the effects of competition on prices and profits are non-monotonic in the degree of inertia. Further, a model that omits consumer inertia tends to overstate the marginal effect of competition on price, relative to a benchmark that accounts for consumer dynamics. We develop an empirical model to estimate consumer inertia using aggregate, market-level data. We apply the model to a hypothetical merger of two major retail gasoline companies, and we find that a static model predicts price increases greater than the price increases predicted when accounting for dynamics.

Keywords: Consumer Inertia, Market Power, Dynamic Competition, Demand Estimation

JEL Classification: D12, D43, L13, L41, L81

Suggested Citation

MacKay, Alexander and Remer, Marc, Consumer Inertia and Market Power (April 29, 2019). Available at SSRN: https://ssrn.com/abstract=3380390 or http://dx.doi.org/10.2139/ssrn.3380390

Alexander MacKay (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Boston, MA 02163
United States

HOME PAGE: http://alexandermackay.org/

Marc Remer

Swarthmore College - Economics Department ( email )

Swarthmore, PA 19081
United States

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