Which of the following statements about market segmentation is true in relation to consumer surplus and willingness to pay?

• A. Market segmentation reduces a firm's ability to price discriminate.
• B. Market segmentation allows firms to capture more consumer surplus by charging different prices based on willingness to pay.
• C. Market segmentation is only possible when all consumers have identical willingness to pay.
• D. Market segmentation always increases total consumer surplus in the market.

Answer: (B)

Verified step by step guidance

1. Understand the concept of market segmentation: it involves dividing consumers into distinct groups based on their willingness to pay or other characteristics, allowing firms to charge different prices to different segments.
2. Recall the definition of consumer surplus: it is the difference between what consumers are willing to pay for a good and what they actually pay.
3. Analyze how market segmentation affects consumer surplus and firm pricing: by charging different prices to different groups, firms can capture more of the consumer surplus as profit, reducing the surplus left to consumers.
4. Evaluate the statements: market segmentation does not reduce a firm's ability to price discriminate; rather, it enables price discrimination. It is not true that all consumers must have identical willingness to pay for segmentation to occur; differences in willingness to pay are necessary. Also, market segmentation typically decreases total consumer surplus because firms capture more surplus.
5. Conclude that the true statement is that market segmentation allows firms to capture more consumer surplus by charging different prices based on willingness to pay.