Market segmentation limits consumer benefits in duopoly competition
The Welfare Limits of Market Segmentation with Captive Consumers
Computer Science and Game Theory
Summary
This paper looks at how splitting customers into groups affects prices and how much buyers and sellers each get in a market with two competing firms. The authors find that consumers fare worst when groups are fully separated and best when customer groups mix and both firms have equal loyal customers. However, when firms have uneven loyal customers, consumers cannot get the best deals even with mixed groups. Prices must vary randomly, which reduces how much consumers benefit compared to fixed prices.
What this means in practice
- •For pricing strategists: Design pricing schemes for markets with captive and contestable customers to predict consumer benefit limits under segmentation.
- •For regulatory economists: Assess how market segmentation impacts consumer welfare and industry profits to inform policies on market competition and pricing transparency.
A theory result. No direct application yet.
Authors
Irfan Tekdir
Abstract
In a duopoly with captive and contested consumers, I characterize every pair of consumer and producer surplus that can arise under some market composition and some public segmentation, and construct a market that produces each pair. The set is lens-shaped. At any level of industry profit, consumers do worst when captive and contested consumers are perfectly separated and best in an unsegmented market in which the two firms have equally many captives. A market with unequal captive bases and some contested consumers cannot reach this upper frontier under any segmentation. Between Bertrand competition and monopoly, the frontier itself lies strictly below what consumers would get if everyone paid a single deterministic price yielding the same profit. Firms must randomize, and with downward-sloping demand the resulting price dispersion lowers consumer surplus.