Procrastination and Competition Failure

We develop a model of price competition with procrastinating consumers in which market discipline is supposed to arise from both the initial selection of providers and the possibility of switching providers. As in other theories, consumers may forego large gains by sticking with their initially chosen offer, so competition at the switching stage is weak. Unlike in other theories, consumers — who falsely expect to switch soon — may also fail to select the best starting offer, so competition at the initial stage is weak as well. This mechanism can translate temporary product differentiation into permanently high prices, greatly enhance the price effect of persistent differentiation, or generate high markups even with perfect substitutes. Reflecting the same mechanism, sign-up deals do not serve their classically hypothesized role of returning ex-post profits to consumers, but instead often exacerbate the failure of price competition. We complement our analysis with a tailored survey of consumers, confirming the logic of procrastination underlying our model. Consumer procrastination thus emerges as a novel source of competition failure that applies where other theories do not, helping to explain high average prices in many markets with switching costs.