Commitment in prices: case for volatility averse consumers

Abstract

This document considers a two period market where a monopoly faces an heterogeneous mass of consumers with a proportion of ``savvy'' consumers that are averse to price changes in a context where the demand changes in the second period. With this structure, I find that the monopolist sees their benefits diminished by these consumers even when they are only a proportion of the total demand. This is explained because the consumer internalizes both period prices and minimizes the loses caused by the adjustment cost. The main finding of the model is that: when markets have a sufficiently large proportion of consumers with volatility aversion, the monopoly is constrained by the consumer "savvyness'' to the changed price. Therefore, a competition authority should not be worried in this market context because the monopoly will not be able to exercise complete market power.