Market segmentation index

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Market segmentation index—or the Celli index of market segmentation, named after the Italian economist Celli G. GianLuca—is a measure of market segmentation. This Index, is a comparative measure of the degree of monopoly power in two distinctive markets for products that have the same marginal costs. The degree of market segmentation is defined as the degree of monopoly power of the producing firm or exporting country. Higher is the average unit value (AUV) of the same product sold in the primary market compared to the benchmark market, greater is the degree of monopoly power in that market and therefore higher is the degree of market segmentation.

Pp/Ps = C, p ≠ s (1)

Pp and Ps are respectively the prices the producing country set in the primary market (primary market or market of interest) Mp and the secondary market (benchmark) Ms, C is the market segmentation index (MSI), which measures the degree of segmentation of the producing country in the two markets. The MSI was extrapolated from the Lerner Index of market power in the form L=(P-MC)/P in the case of multiple market segments.

Proposition 1

If C > 1 then a monopolist country has a higher degree of monopoly power in segment Mp than segment Ms and therefore this country has a greater incentive to specialize in Mp.

Proposition 2

If C < 1 then a monopolist country has a lower degree of monopoly power in segment Mp than segment Ms and therefore this country has a greater incentive to specialize in Ms.

Proposition 3

If C ≈ 1 then a monopolist country experience no difference in the degree of monopoly power between segment Mp and segment Ms and therefore this country has no monopolistic incentive to specialize in either markets.

From Lerner's index to market segmentation index (MSI)

Assumption 1: Marginal costs for the monopolist firm are the same for every market segment

Applying Lerner index L=(P-MC)/P to two distinctive market segments we get the degree of monopoly power in market segment Ms as Ls=(Ps-MC)/Ps and Mp as Lp=(Pp-MC)/Pp. Ps is the price charged in Ms while Pp is the price charged in Mp.

This result confirms the validity of the market segmentation index, which is a comparative measure of the degree of monopoly power in two distinctive markets for products that have the same marginal costs. The result says that when the price in the primary market is strictly greater than the price in the secondary market then the Lerner's index is higher in the primary market and therefore the market segmentation index would also be higher for the primary market.

References

• Anderson E.T. and James D.(2006) Integrating Models of Price Discrimination. Kellog School of Management. Northwestern University.
• Armstrong G. and Kotler P. (2001). Principles of Marketing. ISEDI, Torino.
• Nault, Barrie R. and Wei, Xueqi (David), "Product Differentiation and Market Segmentation of Information Goods" (December 2, 2005). Available at SSRN: [1]
• Spiegel Y. (1997) Second Degree Price Discrimination. Bergals School of Economics. Tel Aviv University.
• Ohmae, K. (1982), The Mind of the Strategist, McGraw-Hill, New York, NY.