Welfare analysis with uncertain market segment proportions

Abstract

This study theoretically explores the impact of market segmentation uncertainty on producers’ production decisions and their subsequent effects on producers’ profits, consumer surplus, and social welfare. This uncertainty creates a mismatch between the producer’s supply and consumer demand, while also decreasing the producer’s market power. An uncertain market segment incentivizes the producer to pursue higher-quality information, which generates conflicts between the producer and consumers when the producer faces capital constraints. Conversely, when the producer has no capital constraints, the interests of both parties align and obtaining higher-quality information improves consumer welfare outcomes.

Keywords

• Welfare
• Uncertainty
• Market segments
• Capital constraint
• Misallocation