Strategy-proof Market Segmentation against Price Discrimination

TL;DR

This paper analyzes strategy-proof market segmentation under consumer switching, providing a complete welfare characterization and constructing segmentations that attain all feasible outcomes.

Contribution

It introduces a model of strategy-proof segmentation with a full welfare characterization and constructs segmentations for all feasible outcomes.

Findings

Producer surplus equals uniform monopoly profit in all strategy-proof segmentations.

Consumer surplus varies from monopoly to buyer-optimal levels, with all consumers weakly better off.

Equilibrium outcomes converge to the welfare characterization as the consumer population grows large.

Abstract

Data regulations increasingly enable consumers to switch among market segments, making segmentation an endogenous outcome of strategic interaction. We study a model in which consumers choose segments before a monopolist sets segment-specific prices, and define a segmentation as strategy-proof when no consumer with positive measure can profitably deviate. Our main result provides a complete welfare characterization: in every strategy-proof segmentation, producer surplus is pinned at the uniform monopoly profit, consumer surplus ranges from the uniform monopoly level to the buyer-optimal level, and every consumer is weakly better off. We construct strategy-proof segmentations attaining every feasible outcome in this range. A finite-consumer model microfounds our solution concept, with equilibrium outcomes converging to our characterization as the population grows large.