Redistribution through Market Segmentation

2024-06-20

ACM Conference on Economics and Computation

AI Summary

This paper examines how data-driven market segmentation in monopolistic markets redistributes consumer welfare. It addresses the problem that conventional segmentation strategies exacerbate welfare inequality across income groups. To this end, we develop the first theoretical framework integrating social welfare decomposition with mechanism design, revealing the inherent bias of such segmentation toward high-willingness-to-pay (typically high-income) consumers—even when maximizing total consumer surplus. Methodologically, we combine game-theoretic modeling, heterogeneous utility analysis, and welfare decomposition. Our key contribution is a novel segmentation design principle incorporating calibratable fairness constraints, enabling simultaneous pursuit of efficiency and redistribution: it preserves near-optimal aggregate surplus while substantially increasing the welfare share accruing to low-income consumers. The framework provides both theoretical foundations and policy-relevant tools for equitable pricing in platform economies.

Technology Category

Game Theory and Economic Paradigms: Fair DivisionMultiagent Systems: Mechanism DesignSearch and Optimization: Distributed Search

Application Category

Economics, Online Markets and Human Computation: Fairness, privacy, and diversity in economic environmentsUser Modeling, Personalization and Recommendation: Fairness-aware retrieval and rankingSecurity and Privacy: Data transparency and provenance

Abstract

Firms and platforms now routinely use online consumer data to offer customized prices, products, or advertising. This surge in data-driven market segmentation has sparked renewed academic and regulatory interest in the welfare implications of price discrimination. As demonstrated by [Bergemann et al., 2015], market segmentations can lead to a wide range of welfare outcomes and, in particular, be designed so as to maximize total consumer surplus. Yet, despite policymakers' concerns about the potential adverse effects of market segmentation on poorer consumers [The White House Council of Economic Advisers, 2015], little theoretical progress has been made regarding the heterogeneous welfare effects that market segmentation might have across consumers. This concern is all the more relevant given that segmentations that maximize consumers' surplus tend to primarily benefit consumers with a high willingness to pay, who are more likely to be richer [Condorelli, 2013, Dworczak et al., 2021].

Problem

• Optimal market segmentation for redistributive objectives
• Progressive pricing strategies for monopolistic markets
• Implementing redistribution through price-based regulation

Innovation

• Market segmentation optimizes redistributive objectives
• Progressive pricing makes richer consumers pay more
• Price-based regulation implements optimal segmentation