Collusive equilibria with switching costs: The effect of consumer concentration

I study the ability of two competing firms to set collusive prices in markets where consumers have switching costs. In consumer markets (with a small number of consumers), I find an antifolk result in which collusion, in the presence of switching costs, does not arise with patient firms. Patient firms compete aggressively and consumers expect a large utility. A collusive equilibrium is unstable because a deviating firm incorporates the future consumer utility in its deviating price. Also, consumers have a strategic impact so, with the prospects of large utility, they decide to switch to destabilize the firms' collusive agreement. These results do not eventuate in markets with a large number of consumers. In mass markets (a continuum of consumers), a single consumer lacks a strategic impact to destabilize a collusive agreement and a deviating firm cannot appropriate the consumer utility when deviating from collusion. Collusion, then, becomes straightforward to achieve. We show that for any number of consumers, switching costs make collusion easy to sustain.