Using Information to Amplify Competition

TL;DR

This paper demonstrates how market segmentation based on consumer information can enhance competition among firms, leading to efficient allocations and profit maximization in differentiated product markets.

Contribution

It introduces a consumer-optimal, public market segmentation model where information amplifies competition by creating dominant firms in each segment.

Findings

Market segmentation results in competitive pricing at marginal cost.

Each firm achieves its minimax profit through segmentation.

Segmentation leads to efficient allocation of resources.

Abstract

I characterize the consumer-optimal market segmentation in competitive markets where multiple firms selling differentiated products to consumers with unit demand. This segmentation is public---in that each firm observes the same market segments---and takes a simple form: in each market segment, there is a dominant firm favored by all consumers in that segment. By segmenting the market, all but the dominant firm maximally compete to poach the consumer's business, setting price to equal marginal cost. Information, thus, is being used to amplify competition. This segmentation simultaneously generates an efficient allocation and delivers to each firm its minimax profit.