Competition versus collusion: The impact of consumer inertia

Amodel of dynamic price competition is analyzed to assess howconsumer 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 sufficientlymyopic; 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.