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Consumer-Optimal Segmentation in Multi-Product Markets

Author

Listed:
  • Dirk Bergemann

    (Yale University)

  • Tibor Heumann

    (Pontificia Universidad Catolica de Chile)

  • Michael C. Wang

    (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.

Suggested Citation

  • Dirk Bergemann & Tibor Heumann & Michael C. Wang, 2024. "Consumer-Optimal Segmentation in Multi-Product Markets," Cowles Foundation Discussion Papers 2420, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:2420
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    File URL: https://cowles.yale.edu/sites/default/files/2025-01/d2420.pdf
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    References listed on IDEAS

    as
    1. Justin P. Johnson & David P. Myatt, 2003. "Multiproduct Quality Competition: Fighting Brands and Product Line Pruning," American Economic Review, American Economic Association, vol. 93(3), pages 748-774, June.
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