State Dependence and Alternative Explanations for Consumer Inertia

Dubé, Jean-Pierre; Hitsch, Günter J.; Rossi, Peter E.

doi:10.2139/ssrn.1361312

Cited by 98 publications

(171 citation statements)

References 34 publications

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“…This can be caused by, for example, consumer inertia (see, e.g. Coscelli 2000;Dubé, Hitsch, and Rossi 2010) or by that many consumers prefer to get exactly the product written on the prescription (Granlund and Rudholm 2012).…”

Section: Heterogeneous Preferencesmentioning

confidence: 99%

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The Effect of Pharmacies’ Right to Negotiate Discounts on the Market Share of Parallel Imported Pharmaceuticals

Granlund

2015

The B.E. Journal of Economic Analysis &Amp; Policy

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This paper analyzes how allowing pharmacies to negotiate discounts with parallel traders and producers affects the market share for parallel imports. Economic theory predicts that discount negotiations will promote products bought directly from the producers because producers have cost advantages, due to which they always underbid the marginal prices of parallel traders. A reform that allowed discount negotiations is found to reduce the market share for parallel imports by about 11 percentage points to reach 31%. The results clearly indicate that pharmacies have an important role in the choice between medically equivalent pharmaceuticals.

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Section: Heterogeneous Preferencesmentioning

confidence: 99%

“…However, because of consumer inertia (Coscelli 2000;Dubé, Hitsch, and Rossi 2010) and/or that a parallel imported version is prescribed, some consumers do prefer parallel imported version. One-fourths of prescriptions analyzed in this study were for parallel imported products.…”

Section: Introductionmentioning

confidence: 99%

The Effect of Pharmacies’ Right to Negotiate Discounts on the Market Share of Parallel Imported Pharmaceuticals

Granlund

2015

The B.E. Journal of Economic Analysis &Amp; Policy

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“…For instance, loss aversion might create attachment to a previously chosen product similar to an endowment effect (Ericson and Fuster, 2011), and consumers may become psychologically attached to brands (Dubé et al, 2009(Dubé et al, , 2010.…”

Section: Switchingmentioning

confidence: 99%

Failing to Choose the Best Price: Theory, Evidence, and Policy

Grubb

2015

Rev Ind Organ

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Both the "law of one price" and Bertrand's (1883) prediction of marginal cost pricing for homogeneous goods rest on the assumption that consumers will choose the best price. In practice, consumers often fail to choose the best price because they search too little, become confused comparing prices, and then show excessive inertia through too little switching away from past choices or default options. This is particularly true when price is a vector rather than a scalar, and consumers have limited experience in the relevant market. All three mistakes may contribute to positive markups that fail to diminish as the number of competing sellers increases. Firms may have an incentive to exacerbate these problems by obfuscating prices, thereby using complexity to make price comparisons difficult and soften competition. Possible regulatory interventions include simplifying the choice environment, for instance by restricting price to be a scalar, advising consumers of their expected costs under each option, or choosing on behalf of consumers. * Boston College, michael.grubb@bc.edu, https://www2.bc.edu/michael-grubb/. I am grateful to Mark Armstrong, Ben Handel, and Rani Spiegler for careful reading and many helpful comments on an earlier draft. I also thank Vera Sharunova for her excellent research assistance.

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“…Setting φ (K) = 0 gives equation (11) To see this, note firstly that (8) is only well-defined if 1 + Kδ c s = 0, which is satisfied provided |K| ≤ 1 − s. Secondly (8) assumes that each firm sells to a positive mass of young consumers. This requires thatx t ∈ (0, 1) which, using equation (5), is equivalent to |K| < 1+Kδ c s. This is again satisfied provided |K| ≤ 1−s.…”

Section: A Main Proofsmentioning

confidence: 99%

“…8 As discussed earlier, one reason is that when switching costs are very large, firms are unable to poach from their rival. Consequently they focus more on harvesting, which is a force for higher prices.…”

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confidence: 99%

Re-examining the effects of switching costs

Rhodes

2014

Econ Theory

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Consumers often incur costs when switching from one product to another.Recently there has been renewed debate within the literature about whether these switching costs lead to higher prices. We build a theoretical model of dynamic competition and solve it analytically for a wide range of switching costs.We provide a simple condition which determines whether switching costs raise or lower long-run prices. We also show that switching costs are more likely to increase prices in the short-run. Finally switching costs redistribute surplus across time, and as such are shown to sometimes increase consumer welfare.

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State Dependence and Alternative Explanations for Consumer Inertia

Cited by 98 publications

References 34 publications

The Effect of Pharmacies’ Right to Negotiate Discounts on the Market Share of Parallel Imported Pharmaceuticals

The Effect of Pharmacies’ Right to Negotiate Discounts on the Market Share of Parallel Imported Pharmaceuticals

Failing to Choose the Best Price: Theory, Evidence, and Policy

Re-examining the effects of switching costs

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