Market Segmentation With Nonlinear Pricing

This paper studies the e¤ect of captive consumers in a competitive model of nonlinear pricing. We focus on the bene…ts and drawbacks of allowing what we call market segmentation, namely, a situation where the price-quality menu o¤ered to captive consumers can di¤er from that o¤ered to consumers that are exposed to competition. We …nd that the e¤ect of market segmentation depends on the relationship between the range of consumer preferences found in captive markets and that found in competitive markets. When the range of consumer preferences in captive markets is “wide”, segmentation is quality and (aggregate) welfare reducing, while the opposite holds when the range of consumer preferences in captive markets is “narrow”. Segmentation always harms captive consumers, while it always bene…ts consumers located in competitive markets. JEL Classi…cations: D43, L1.