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Competition versus Collusion: The Impact of Consumer Inertia

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Working paper
Author/s: 
Iwan Bos , Ronald Peeters and Erik Pot
Issue number: 
RM/12/046
Publisher: 
Maastricht University
Year: 
2012
We consider a model of dynamic price competition to analyze the impact of consumer inertia on the ability of rms to sustain high prices. Three main consequences are iden- ti ed: (i) maintaining high prices does not require punishment strategies when rms are su ciently myopic, (ii) if buyers are su ciently 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 the discount factor. These results provide a number of valuable insights with regard to competitive and collusive pricing behavior. For example, our ndings suggest that measures aiming at lowering the degree of consumer inertia may in fact facilitate collusion in network industries.
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