A Cooperative Theory of Market Segmentation by Consumers

Nima Haghpanah (PennState)

Abstract, joint work with Ron Siegel: We consider a single-product market that may be segmented into several market segments each served by a single seller. The price that the seller optimally charges in a segment, and thus the surplus of each consumer, depends on the set of consumers in that segment.  We consider the market segmentations that result from a cooperative game between consumers.  We study several solution concepts that differ in the kind of coalitions of consumers that can object to a proposed segmentation. The most restrictive solution concept, the core, allows for all possible objections and is generally empty. We propose a novel notion of stability, which allows for objections that do not themselves raise objections, and show that stable segmentations always exist.  We characterize stable segmentations as those that are efficient and satiated, in the sense that consumers in a segment are not willing to accept consumers from another segment with a higher price.  We also study a weaker solution concept, fragmentation-proofness, which only allows for objections by coalitions of consumers within a segment, and show that a segmentation is fragmentation-proof if and only if it is efficient.

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