The Welfare Limits of Market Segmentation with Captive Consumers

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.