Economic aspects of market segmentation without supply control

Abstract

In recent years, marketing agencies operating on behalf of New Zealand agricultural industries in export markets have placed increasing emphasis on market segmentation policies as a means of achieving producer objectives. However, many of the prescriptions for segmentation have been developed within the context of monopolistic or oligopolistic industries. Firms operating under these conditions have no or few competitors and have the ability to control output to profit maximization levels. However, typically structured agricultural industries do not have these features.

In this study, an economic model of market segmentation without supply control was constructed. The model incorporated the optimal allocation of industry output to any number of market segments, and included aspects of promotion given this optimal pricing behaviour. From the model, it was determined that market segmentation outcomes were influenced by a number of variables. Producer returns were high when the price elasticities of demand and supply were low, and the divergence between demand elasticities in individual market segments was large. It was also noted that these demand elasticities are themselves influenced by a further set of factors, including the market share held in a particular market segment, the extent of product differentiation and competitive supply responses. Analysis of the promotion component of the model suggested that promotion activity should be carefully targeted, with more effort being directed towards less price elastic market segments.

An application of the model to the export of New Zealand sheepmeats indicated that gains from market segmentation activity were high in the short-term. However, they were heavily eroded in the long-term, largely as a result of competitive supply responses.