Competition versus Collusion: The Impact of Consumer Inertia

We consider a model of dynamic price competition to analyze the impact of consumer inertia on theability of firms to sustain high prices. Three main consequences are identified: (i) maintaininghigh prices does not require punishment strategies when firms are sufficiently myopic, (ii) ifbuyers are sufficiently inert, then high prices can be sustained for all discount factors, and(iii) the ability to maintain high prices may depend non-monotonically on the level of thediscount factor. These results provide a number of valuable insights with regard to competitiveand collusive pricing behavior. For example, our findings suggest that measures aiming at loweringthe degree of consumer inertia may in fact facilitate collusion in network industries.