Consumer Inertia and Dynamic Price Competition
Consumer Inertia and Dynamic Price Competition

Summary/Abstract: The aim of this research is to study firms’ decisions about price and quality in a set-ting where consumers cannot fully evaluate products and must rely on anecdotalevidence to make choices. Additionally, consumers exhibit inertia, or an overat-tachment to past purchases, in their decision making. To analyse firms’ behaviour,we employ a 2‑period price competition model in which firms can choose theirproduct quality. Consumers are aware of prices but learn about product qualitythrough experience and anecdotal evidence, which influence their choices accordingto a simple decision rule. We obtain analytical results in the form of a Nash equi-librium for pricing and quality strategies across various levels of consumer inertiaand conduct comparative statics. Our findings suggest that inertia intuitively makesthe market less competitive as firms gain monopoly power over attached consum-ers. However, inertia also intensifies competition for unattached consumers andencourages firms to enhance product quality. Consequently, in certain situations,inertia can reduce product prices and contribute to improved market welfare.

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