Profitable Pricing When Market Segments Overlap

Eitan Gerstner and Duncan Holthausen
Additional contact information
Eitan Gerstner: North Carolina State University
Duncan Holthausen: North Carolina State University

Marketing Science, 1986, vol. 5, issue 1, 55-69

Abstract: In this paper, we analyze profitable pricing strategies when market segments overlap. Overlapping markets are segments that are not perfectly sealed, and leakage between them can occur. Different consumers are assumed to incur possibly different transaction costs if they choose to purchase in the low-price market. A monopolist seller knows the distribution of transaction costs across consumers and must choose an optimal pricing strategy. In particular, the monopolist must decide whether to charge a single price or to price differentiate. Conditions are derived under which price differentiation will be the most profitable strategy. When price differentiation is optimal, the equilibrium amount of leakage is determined endogenously. Unlike the standard economics textbook model of price discrimination in which zero leakage is determined exogenously and is usually given as a necessary condition for price discrimination, we show that zero leakage is not necessary for differential pricing to be optimal, and that price differentiation can be optimal even when leakage between markets is substantial. We also show that by imposing restrictions on the low-price market buyers, the seller can control leakage and increase profits. Market-specific managerial applications are illustrated.

Keywords: market segmentation; pricing; differential pricing; price discrimination (search for similar items in EconPapers)
Date: 1986
References: Add references at CitEc
Citations: View citations in EconPapers (21)

Downloads: (external link)
http://dx.doi.org/10.1287/mksc.5.1.55 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:5:y:1986:i:1:p:55-69

Access Statistics for this article

More articles in Marketing Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().