Discriminating against Captive Customers

Dec 2019

American Economic Review Insights, Vol. 1, No. 3, pp. 257-72

DOI: https://doi.org/10.1257/aeri.20180581

We analyze a market where some consumers only consider buying from a specific seller while other consumers choose the best deal from several sellers. When sellers are able to discriminate against their captive customers, we show that discrimination harms consumers in aggregate relative to the situation with uniform pricing when sellers are approximately symmetric, while the practice tends to benefit consumers in sufficiently asymmetric markets. We also show how the asymmetry of markets may be affected by the information that firms have on consumer captivity.