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Competition versus collusion: The impact of consumer inertia
Author(s) -
Bos Iwan,
Peeters Ronald,
Pot Erik
Publication year - 2017
Publication title -
international journal of economic theory
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 11
eISSN - 1742-7363
pISSN - 1742-7355
DOI - 10.1111/ijet.12136
Subject(s) - collusion , economics , competition (biology) , microeconomics , inertia , punishment (psychology) , industrial organization , monetary economics , psychology , ecology , social psychology , physics , classical mechanics , biology
Abstract A model of dynamic price competition is analyzed to assess how consumer inertia may impact the ability of firms to sustain high prices. Three main consequences are identified: maintaining high prices does not require punishment strategies when firms are sufficiently myopic; for sufficiently high levels of inertia, high prices can be sustained at all discount factors; and the ability to maintain high prices may depend non‐monotonically on the level of the discount factor. Our findings offer implications for strategic firm behavior and public policy. For example, measures aiming to reduce the degree of consumer inertia are unambiguously effective in traditional markets, but may facilitate collusion in network industries.