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Consumer-Optimal Segmentation in Multi-Product Markets

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  • Dirk Bergemann
  • Tibor Heumann
  • Michael C. Wang

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 monotonicity$\unicode{x2014}$higher-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.

Suggested Citation

  • Dirk Bergemann & Tibor Heumann & Michael C. Wang, 2024. "Consumer-Optimal Segmentation in Multi-Product Markets," Papers 2401.12366, arXiv.org, revised Dec 2024.
    • Handle: RePEc:arx:papers:2401.12366
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    References listed on IDEAS

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    1. Joan Robinson, 1969. "The Economics of Imperfect Competition," Palgrave Macmillan Books, Palgrave Macmillan, edition 0, number 978-1-349-15320-6.
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