Screening and Segmenting: A Consumer Surplus Perspective
This provides a theoretical framework for understanding when market segmentation benefits or harms consumers, relevant for antitrust and regulatory policy.
The paper characterizes consumer-optimal segmentation when a monopolist uses both second- and third-degree price discrimination, finding that consumers with the same value receive the same quality across segments. It shows that segmentation harms consumers if and only if demand is sufficiently more elastic than supply, with implications for regulatory policy.
We analyze consumer surplus 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 sufficiently more elastic than supply. Hence, potential benefits for consumers depend critically on demand and supply elasticities. These findings have implications for regulatory policy regarding price discrimination and market segmentation.