Consumer Inertia and Market Power

64 Pages Posted: 6 May 2019 Last revised: 1 Feb 2022

See all articles by Alexander MacKay

Alexander MacKay

Harvard University - Business School (HBS)

Marc Remer

Swarthmore College - Economics Department

Date Written: January 29, 2022

Abstract

We study the pricing decision of firms in the presence of consumer inertia. Inertia, which can arise from habit formation, brand loyalty, and switching costs, generates dynamic pricing incentives. These incentives mediate the impact of competition on market power in oligopoly settings. For example, dynamic incentives can limit the equilibrium price effects of a horizontal merger. However, the way that the merger is implemented---whether the merged firm maintains separate brands or consolidates them into a single entity---can have large effects on equilibrium prices in the presence of inertia. We develop an empirical oligopoly model to estimate consumer inertia and dynamic pricing incentives using market-level data. We apply the model to a hypothetical merger of retail gasoline companies, and we find that a static model predicts greater price increases than those obtained while 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 (January 29, 2022). Available at SSRN: https://ssrn.com/abstract=3380390 or http://dx.doi.org/10.2139/ssrn.3380390

Alexander MacKay (Contact Author)

Harvard University - Business School (HBS) ( 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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