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  • *A previous version of this paper was entitled ‘Nonlinear Pricing, Multimarket Duopolists and Third-Degree Price Discrimination.’ I thank the Editor and two anonymous referees for providing very useful comments and suggestions. I am also indebted to Jean-Charles Rochet, Lars Stole, John Sutton and seminar participants at the London School of Economics and the University of Bristol. All errors are my own.


We study the benefits and drawbacks of allowing firms to offer different price-quality menus to captive consumers and to consumers more exposed to competition (market segmentation). We show that the effect of market segmentation depends on the relationship between the range of consumer preferences found in captive and competitive markets. When the range of consumer preferences in captive markets is ‘wide,’ segmentation is quality and (aggregate) welfare reducing, while the opposite holds when the range of consumer preferences in captive markets is ‘narrow.’ Segmentation always harms captive consumers, while it always benefits consumers located in competitive markets.