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    Consumer Inertia and Market Power
    10 May 2019Working Paper Summaries

    Consumer Inertia and Market Power

    by Alexander MacKay and Marc Remer
    Consumers are often more likely to buy a product if they have purchased it previously. This paper provides a means to estimate the magnitude of this phenomenon (i.e., consumer inertia) and shows how it affects the prices of firms in competitive settings. Perhaps surprisingly, greater consumer inertia can result in smaller price increases after a merger.
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    Author 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.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: April 2019
    • HBS Working Paper Number: HBS Working Paper #19-111
    • Faculty Unit(s): Strategy
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