Consumer heterogeneity and pricing in a duopoly with switching costs

Abstract

It is well-known that switching costs may facilitate monopoly pricing in a market with price competition between two suppliers of a homogenous good, provided the switching costs is above some critical level. We show that introducing consumer heterogeneity tends to increase the critical switching cost and thereby reduce the stability of the collusive outcome. A testable implication is that widespread price discrimination should go hand in hand with efforts to create switching costs.