Inert Consumers in Markets with Switching Costs and Price Discrimination

This paper analyzes an infinite-period oligopoly model where consumers incur costs when switching supplier. Every period only a fraction α of consumers considers switching. Firms can price-discriminate between their current customers and consumers who did not buy from the firm in the past period. In this setting, firms set relatively low introductory prices to attract new consumers. Contrary to previous findings in switching costs models, the full price can both increase and decrease in switching costs, while the introductory price always decreases. Moreover, the introductory price increases in α while the full price again can both increase and decrease.