Consumer Inertia and Market Power

60 Pages Posted: 6 May 2019 Last revised: 6 Apr 2021

See all articles by Alexander MacKay

Alexander MacKay

Harvard University - Business School (HBS)

Marc Remer

Swarthmore College - Economics Department

Date Written: April 5, 2021

Abstract

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

MacKay, Alexander and Remer, Marc, Consumer Inertia and Market Power (April 5, 2021). 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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
168
Abstract Views
1,113
rank
212,305
PlumX Metrics