Price and Quality Decisions of a Service Provider under Heterogeneous Demand

A monopolist service provider's quality and price decisions are analyzed in a vertically differentiated market where customers demand different quantities of a service. We find that depending on the relative sizes of the market segments and the difference in the valuations of different customers, the service provider may find it optimal to either offer a nondiscriminating service or a discriminating service serving only high-valuation customers. The service provider never finds it optimal to serve the market segments that have low-valuation for quality when the discrimination strategy is optimal.