Segmentation Opportunities for a Social Planner: Impact of Limited Resources

In this research note, we investigate segmentation opportunities for social planners such as government agencies, nonprofits, and public organizations. These opportunities arise when the potential products are vertically (quality) differentiated and the consumers are heterogeneous in their preferences toward quality. In these cases, whether to offer quality differentiated products and what quality level to choose are important decisions for a social planner. In this research note, we identify the conditions where it is socially optimal to offer either one homogenous or two quality differentiated products. We find that the resource limitations may result in a single product offering and that the quality of the product depends on the maximum surplus per unit resource consumed by the products. We also compare our findings to a profit-maximizing firm. We find that the resource limitations may cause a profit-maximizing firm to provide a better service to some consumers than the social planner. Contrary to common wisdom, we also show that the capacity limitations may force the social planner to act like a profit-maximizing firm in terms of its pricing and product mix choice.