Consumer-Optimal Segmentation in Multi-Product Markets

Dirk Bergemann, Tibor Heumann and Michael Wang
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Michael Wang: Yale University

No 2420, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We analyze how market segmentation affects consumer welfare when a monopolist can engage in both second-degree price discrimination (through product differentiation) and third-degree price discrimination (through market segmentation). We characterize the consumer-optimal market segmentation and show that it has several striking properties: (1) the market segmentation displays monotonicityÑhigher-value customers always receive higher quality product than lower-value regardless of their segment and across any segment; and (2) when aggregate demand elasticity exceeds a threshold determined by marginal costs, no segmentation maximizes consumer surplus. Our results demonstrate that strategic market segmentation can benefit consumers even when it enables price discrimination, but these benefits depend critically on demand elasticities and cost structures. The findings have implications for regulatory policy regarding price discrimination and market segmentation practices.

Pages: 70 pages
Date: 2024-12-22
New Economics Papers: this item is included in nep-com, nep-ind, nep-mic and nep-reg
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Working Paper: Consumer-Optimal Segmentation in Multi-Product Markets (2024)
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