Pareto-Improving Segmentation of Multiproduct Markets

We investigate whether a market served by a multiproduct monopolistic seller can be segmented in a way that benefits all consumers and the seller. The seller can offer a different product menu in each market segment, combining second-and third-degree price discrimination. We show that markets for which profit maximization leads to ineffi-ciency can, generically, be segmented into two market segments in a way that increases the surplus of all consumers weakly and of some consumers and the seller strictly. Our constructive proof is based on deriv-ing implications of binding incentive compatibility constraints when profit maximization implies inefficiency.