Consumer Inertia and Market Power
60 Pages Posted: 6 May 2019 Last revised: 6 Apr 2021
Date Written: April 5, 2021
We study the pricing decision of firms in the presence of consumer inertia. Inertia, which can arise from habit formation, brand loyalty, switching costs, or search, has important implications for equilibrium outcomes and affects market power. Holding market structure fixed, greater inertia can increase or decrease prices. Changes to market structure---e.g., through a merger---can have lower impacts on prices in the presence of inertia. Thus, consumer inertia plays an important role in mediating horizontal competition. 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 can predict 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: Suggested Citation