Notes on Aggregation Criteria in Market Segmentation

Abstract

First, the authors seek to dispel any misunderstanding that standard price discrimination theory prescribes a profit-maximizing aggregation criterion. They argue that Tollefson and Lessig misinterpreted this theory, but prove that the latter authors’ unwarranted implication is justified in the case of linear demand functions and constant marginal costs. Second, the authors argue that the “theoretical evidence” presented by Tollefson and Lessig against using elasticities to cluster segments is, in fact, no evidence at all, and that their simulations may be valid only under extreme conditions. Finally, a new theorem is offered which provides some support for using clustering techniques to disaggregate markets.