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Customer-class pricing, parallel trade and the optimal number of market segments

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  • Braouezec, Yann
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    Abstract

    We consider the optimal market segmentation problem of a monopolist that faces a continuum of customers when it is costly to prevent resale (or parallel trade) among groups. In our framework, the monopolist chooses the number k≥1 of market segments, but also their design and the discriminatory prices. All these quantities are chosen to maximize the total profit. We solve the profit maximization problem when demands are linear and parallel as a function of the cost of separating markets. We show that market segmentation and prices cannot be chosen independently, and we also show that it is optimal to create only a few market segments. We then turn to the welfare analysis and show that the socially optimal number of market segment is equal to three.

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    Bibliographic Info

    Article provided by Elsevier in its journal International Journal of Industrial Organization.

    Volume (Year): 30 (2012)
    Issue (Month): 6 ()
    Pages: 605-614

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    Handle: RePEc:eee:indorg:v:30:y:2012:i:6:p:605-614

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    Web page: http://www.elsevier.com/locate/inca/505551

    Related research

    Keywords: Monopoly; Third-degree price discrimination; Endogenous market segmentation; Parallel trade;

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    Cited by:
    1. Yann Braouezec, 2013. "The Welfare Effects of Regulating the Number of Market Segments," Working Papers 2013-ECO-11, IESEG School of Management.

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