Bergemann et al. reveal optimal segmentation for consumer surplus

In a new theoretical economics paper, "Screening and Segmenting: A Consumer Surplus Perspective," Dirk Bergemann, Tibor Heumann, and Michael C. Wang explore how a monopolist can simultaneously adjust prices and product qualities across different customer segments—a practice known as combining second-degree (quality-based) and third-degree (group-based) price discrimination. The authors characterize the segmentation that maximizes consumer surplus, revealing a surprising result: consumers with the same valuation receive the same product quality in every segment, even though they may be charged different prices.

Under mild conditions, the paper shows that any segmentation unambiguously harms consumers if and only if demand is sufficiently more elastic than supply. Conversely, when supply elasticity dominates, segmentation can actually benefit consumers. This insight flips conventional wisdom about price discrimination always hurting buyers. The findings have direct implications for regulators evaluating market segmentation strategies in industries like streaming, pharmaceuticals, and software, where companies often bundle tiered pricing with personalized offers.