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Working paper 790
Yanlin Chen, Xianwen Shi, Jun Zhang, "Welfare of Competitive Price Discrimination with Captive Consumers", 2025-01-16
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Abstract: We study the welfare effects of price discrimination in a duopoly market with both captive and contested consumers. Using a unified information design approach, we characterize the best and worst market segmentations for producer surplus, consumer surplus, and social surplus. The firm-optimal segmentation, which divides the market into two nested segments, consistently harms consumers compared to uniform pricing. The consumer-optimal segmentation, which divides the market into a symmetric segment and a nested segment, sometimes leads to a Pareto improvement. Social surplus, if monotone in firm profit, is often maximized either by the firm-optimal or consumer-optimal segmentation.

Keywords: Information Design, Market Segmentation, Firm-optimal Segmentation, Consumer-optimal Segmentation

JEL Classification: D43; D82