Consumer Heterogeneity and Pricing in a Duopoly with Switching Costs.

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 cost is above some critical level. With heterogeneous consumers monopoly pricing entails second degree price dierentiotation with inecient contracts for low demand types. We show that introducing con- sumer heterogeneity may increase the critical switching cost needed to sustain a pure-strategy equilibrium involving monopoly pricing.