Screening and Segmenting: A Consumer Surplus Perspective

TL;DR

This paper analyzes how market segmentation and price discrimination by a monopolist impact consumer surplus, revealing conditions under which segmentation harms consumers and implications for regulation.

Contribution

It characterizes the optimal consumer segmentation structure and identifies when segmentation benefits or harms consumers based on demand elasticity and costs.

Findings

Consumers with the same value receive identical quality across segments.

Segmentation generally harms consumers if demand elasticity exceeds a certain threshold.

Implications for policy depend on demand elasticity and cost conditions.

Abstract

We study how market segmentation affects consumers when a monopolist can adjust both prices and product qualities across segments, engaging in second- and third-degree price discrimination simultaneously. We characterize the consumer-optimal segmentation and show that it has a striking structure: consumers with the same value receive the same quality in every segment, though prices differ. Under mild conditions, any segmentation harms consumers if and only if demand is more elastic than a cost-determined threshold. Hence, potential benefits for consumers depend critically on cost and demand elasticities. These findings have implications for regulatory policy regarding price discrimination and market segmentation.