Behavior-based price discrimination in a horizontally and vertically differentiated duopoly with switching costs

This paper analyzes behavior-based price discrimination (BBPD) in an asymmetric duopoly with switching costs and including both vertical and horizontal differentiation. We demonstrate that there are two configurations of market share in equilibrium. In the first configuration, where both firms poach their rival’s consumers, the equilibria arise when switching costs are low and the firms are relatively symmetric. In the second configuration, where only the firm with more supporting services poaches the rival’s consumers, the resulting equilibria reverse. We reveal the impact of switching costs on firm profits under BBPD as well as under uniform pricing and show that with either high switching costs or sufficiently large firm asymmetries, BBPD may benefit both firms. Moreover, we find that in the second market configuration, social welfare can be higher with BBPD than with uniform pricing under high switching costs and large firm asymmetries. We also reach the same conclusion regarding social welfare when consumers are myopic in the first market configuration.