Second-period pricing in a duopoly with switching costs: the effect of size and composition of customer bases

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. It is also well known that asymmetric size of customer bases makes monopoly pricing more difficult. Adding consumer heterogeneity to the model we demonstrate that also composition of each firm's customer base affects pricing, and this composition may aggravate or ease the incentives to break out of the monoply pricing equilibrium.