Market Segmentation Strategies of Multiproduct Firms ∗ Ulrich

We analyze a multiproduct duopoly and ask whether firms should offer general purpose products or tailor their offerings to fit specific consumer needs. There are two effects of offering a targeted product: (i) if a consumer’s favorite product is offered, her utility increases because there is a better fit between product and preferences; (ii) if her favorite product is not offered, the consumer’s utility decreases because she gets a product that is not tailored to her needs at all. Previous work has not considered these two effects jointly and has therefore not been able to capture the tradeoff inherent in market segmentation: for some consumers utility increases due to increased “fit” whereas for others utility decreases due to increased “misfit.” We show that in addition to the degree of fit and misfit, the intensity of competition and the fixed cost of offering an additional product determine firms’ market segmentation strategies.