Consumer Inertia and Market Power

A New Approach to Estimating State Dependence in Consumers’ Brand Choices Applied to 762 Pharmaceutical Markets*

“…The existence of state dependence in choices among substitutes implies that optimal pricing is not static. As Osborne [2011] and MacKey and Remer [2019] explain, this is important to consider when analyzing competition in markets, for example, when performing merger analysis, and doing this requires accurate estimates of the state dependence effect. Therefore, I hope that others will use approaches similar to the one introduced in this article to study state dependence effects in markets for which the methods previously used give imprecise estimates or rest on many restrictive assumptions, and in markets for which state dependence has not yet been studied.…”

“…The estimation approach used in this article differs substantially from that of Yeo and Miller [2018], MacKay and Remer [2019], and others who used aggregated market shares to estimate state dependence. Perhaps the most important difference is that having information on the individual's last purchases makes it possible to calculate separate market shares depending on which product the consumer bought the previous time.…”

“…State dependence gives firms incentives to set temporarily low prices, potentially even below marginal cost, and to harvest the increased demand generated by this in periods with high prices. Therefore, state dependence increases price variability, and typically also increases mean prices (MacKey and Remer [2019]). State dependence can also affect firms’ entry decisions because it increases the first‐mover advantage.…”

“…From a policy perspective, knowledge about state dependence is useful, for example, when considering information campaigns, the choice regarding default options, or changing market rules. State dependence is also important in merger analysis because long‐term price elasticities can be seriously underestimated when state dependence is ignored (Osborne [2011]) and because the dynamic price effect caused by state dependence affects how mergers influence prices (MacKey and Remer [2019]).…”

Platform Behavior under Market Shocks: A Simulation Framework and Reinforcement-Learning Based Study

“…This behavior was observed in choosing consumer packaged goods [26,9], health insurance [11] and auto insurance [14], among others. We adopt a similar model to [8,17,10], where the inertia is modeled as an additional additive term to the agent's surplus of the current decision. We differ from these models by considering an inertia that is increasing as the period in which the agent makes the decision increases.…”