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When (Not) to Segment Markets

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  • Catherine Gendron-Saulnier
  • Marc Santugini

Abstract

A monopoly decides whether to segment two separate markets. Demand depends on stochastic shocks and some buyers are uninformed about the quality of the good. Contrary to the case of complete information, we show that it is not always more profitable for the firm to segment the markets in an environment in which some buyers have incomplete information. The reason is that the presence of uninformed buyers provides the firm with the incentive to engage in noisy price-signaling. Indeed, if the benefit from price flexibility (through market segmentation) is offset by the cost of signaling quality through two distinct prices, then it is optimal not to segment the markets and to use uniform pricing.

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File URL: http://www.cirpee.org/fileadmin/documents/Cahiers_2013/CIRPEE13-35.pdf
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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 1335.

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Date of creation: 2013
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Handle: RePEc:lvl:lacicr:1335

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Related research

Keywords: Market integration; market segmentation; Learning; Monopoly; Profits; Noisy signaling; Third-degree price discrimination;

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References

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  1. Richard Friberg, 2003. "Common Currency, Common Market?," Journal of the European Economic Association, MIT Press, vol. 1(2-3), pages 650-661, 04/05.
  2. Catherine Gendron-Saulnier & Marc Santugini, 2013. "The Informational Benefit of Being Discriminated," Cahiers de recherche 13-02, HEC Montréal, Institut d'économie appliquée.
  3. Mirman, Leonard J. & Salgueiro, Egas M. & Santugini, Marc, 2014. "Noisy signaling in monopoly," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 504-511.
  4. Chien-Ping Chen, 2009. "A Puzzle or a Choice: Uniform Pricing for Motion Pictures at the Box," Atlantic Economic Journal, International Atlantic Economic Society, vol. 37(1), pages 73-85, March.
  5. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
  6. Gallo, Fredrik, 2010. "To Segment or Not to Segment Markets? A Note on the Profitability of Market Segmentation for an International Oligopoly," Working Papers 2010:5, Lund University, Department of Economics.
  7. Friberg, Richard, 2000. "Two monies, two markets? Variability and the option to segment," Working Paper Series in Economics and Finance 349, Stockholm School of Economics.
  8. Schmalensee, Richard., 1980. "Output and welfare implications of monopolistic third-degree price discrimination," Working papers 1095-80., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  9. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
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