Switching costs, consumer heterogeneity and price discrimination

Abstract

In a duopoly with price discrimination and switching costs, we analyse the evolution of market structure, when an incumbent and a new entrant compete, and a new class of users with lower willingness to pay appears in the market. We find that the market share of the new entrant depends on the degree of heterogeneity and the level of switching costs. In particular, if the degree of heterogeneity is intermediate, the evolution of market structure is similar for high and null switching costs. Since consumer surplus and social welfare are unambiguously lower under high switching costs, this result points at the risk of inferring the degree of market competitiveness from the convergence in market shares.