A Model of Consumer Inertia with Applications to Dynamic Pricing
Article first published online: 30 MAR 2009
© 2009 Production and Operations Management Society
Production and Operations Management
Volume 18, Issue 4, pages 365–380, July/August 2009
How to Cite
Su, X. (2009), A Model of Consumer Inertia with Applications to Dynamic Pricing. Production and Operations Management, 18: 365–380. doi: 10.1111/j.1937-5956.2009.01038.x
- Issue published online: 1 JUL 2009
- Article first published online: 30 MAR 2009
- History: Received: September 2007; Accepted: November 2008 by Teck Ho; after 2 revisions.
- behavioral decision-making;
- dynamic pricing;
- customer behavior
This paper introduces a decision model of consumer inertia. Consumers exhibit inertia when they have an inherent bias to delay purchases. Inertia may induce consumers to wait even when it is optimal to buy immediately. We embed our decision model within a dynamic pricing context. There is a firm that sells a fixed capacity over two time periods to an uncertain number of both rational and inertial consumers. We find that consumer inertia has both positive and negative effects on profits: it decreases demand (in period one) but intensifies competition among consumers for the product (in period two). We show that our model of inertia is consistent with well-established behavioral regularities, such as loss aversion and probability weighting in the sense of prospect theory, and hyperbolic time preferences. We offer practical recommendations for firms to influence the level of consumer inertia. These include offering returns policies (to mitigate potential consumer losses), providing decision aids (to avoid perception errors), and offering flexible payment options (to lower transaction costs).