Market Composition and the Consumer Surplus-Profit Frontier in Monopoly Screening

TL;DR

This paper analyzes how the composition of markets shaped by upstream actors affects consumer surplus and profits in monopoly screening, revealing the conditions for optimal market configurations.

Contribution

It introduces a model linking upstream market composition choices to welfare outcomes and characterizes the Pareto frontier of consumer surplus and profit.

Findings

Optimal market composition depends on the weight on consumer surplus.

Higher emphasis on consumer surplus leads to less top-heavy markets.

Under mild conditions, the optimal market composition is unique.

Abstract

Economic institutions often influence market outcomes not by directly controlling sellers' menus, but by shaping the market composition sellers face. We study the welfare effects of this upstream choice in a monopoly screening model. An upstream actor chooses the distribution of buyer valuations, after which a monopolist screens optimally. We characterize the consumer surplus-profit frontier across market compositions: as the weight on consumer surplus varies, the payoff pair induced by the optimal market composition traces the Pareto frontier. If profit receives at least as much weight as consumer surplus, the optimal market composition collapses to the top type. Otherwise, it exhibits no exclusion, no interior bunching, and a positive mass at the highest valuation. Under a mild curvature condition, the optimal market composition is unique. Greater weight on consumer surplus makes the market less top-heavy: the differentiated interior expands and the premium top segment shrinks.