Introduction

In this chapter, we extend the model of facilities-based competition from Chapters 3 and 4 to a situation with a segmented market and various possibilities of consumer heterogeneity. In particular, we suppose that there are two different market segments, such as residential customers and business customers. Some other possibilities are: an urban and a rural segment; a fixed and a mobile segment; or two different countries. Operators can distinguish the segments and, if regulation permits, are able to choose different pricing strategies for the two segments.

Throughout this chapter, we assume that the market segmentation is crude enough for operators to be able to tell the segments apart and to address them in different ways. Operators are able to observe a certain signal related to a customer's identity and know their preferences. For example, it can be observed whether a customer subscribes as a private person or on behalf of a company. Accordingly, we focus on “third-degree” price discrimination.

Note that within a segment or sub-market, customers may exhibit a whole range of different traits that cannot be directly observed by fims. In reality, one often observes that firms use implicit or “second-degree” price discrimination: they select indirectly between customer types by offering different packages. For example, mobile operators typically offer a variety of contracts (a “menu”), aiming at self-selection of the different consumer types. Usually, implicit price discrimination requires a complex analysis and may lead to a wide variety of contracts.