Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2010:5: To Segment or Not to Segment Markets? A Note on the Profitability of Market Segmentation for an International Oligopoly

Fredrik Gallo ()
Additional contact information
Fredrik Gallo: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: Recent research on endogenous market segmentation finds that a monopoly’s expected profit under perfectly segmented markets increases (relative to its profits under perfectly integrated markets) with exchange rate volatility. The firm thus has an incentive to make consumer resale increasingly difficult. We show that such an incentive may be absent for two firms competing in a Cournot fashion. While limitless consumer arbitrage forces a monopolist to deviate from its optimal pricing policies, it acts as a “disciplining device” helping the Cournot duopoly to approach and commit to the cartel solution in some markets. The firms’ total profit may hence be higher when they engage in integrated-market pricing and neither firm would have an incentive to take on additional costs to facilitate segmenting.

Keywords: arbitrage; Cournot duopoly; exchange rate volatility; market segmentation; third degree price discrimination

JEL-codes: D43; F31; L13

19 pages, May 14, 2010

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