2021
Working Paper
HBS Working Paper Series

Consumer Inertia and Market Power

Format:Print
| Language:English

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; Consumer Behavior; Markets; Performance; Competition; Price

Citation

MacKay, Alexander, and Marc Remer. "Consumer Inertia and Market Power." Harvard Business School Working Paper, No. 19-111, April 2019. (Revised April 2021. Direct download.)