Which of the following situations best illustrates market segmentation in a competitive market?

• A. All firms in the market sell identical products at the same price.
• B. A firm charges different prices for the same product in different geographic regions based on local demand.
• C. Consumers have perfect information and can freely switch between sellers.
• D. A single firm sets the market price for all competitors.

Answer: (B)

Verified step by step guidance

1. Understand the concept of market segmentation: it occurs when a firm divides the market into distinct groups of consumers and charges different prices or offers different products based on characteristics like location, preferences, or willingness to pay.
2. Analyze each option to see if it reflects this idea of dividing the market and charging different prices or offering different terms to different groups.
3. Option 1 describes identical products sold at the same price by all firms, which reflects a perfectly competitive market without segmentation.
4. Option 2 describes a firm charging different prices for the same product in different geographic regions, which directly illustrates market segmentation by geographic location and price discrimination.
5. Options 3 and 4 describe characteristics of perfect competition and monopoly pricing, respectively, but do not illustrate market segmentation.