Consumer heterogeneity, incomplete information 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 cost is above some critical level. With heterogeneous consumers and incomplete information about individual consumers’ types, monopoly pricing entails second-degree price discrimination with inefficient contracts for low demand types. We show that introducing consumer heterogeneity may increase the critical switching cost needed to sustain a pure-strategy equilibrium involving monopoly pricing.