A Model of Market Segmentation with Risk

We characterize an optimal scheme for the sale of multiple items of a good by a monopolist in a market comprised of risk averse buyers. It is established that by randomizing prices in one channel while also offering a risk-free alternative in another a seller may obtain segmentation benefits. The optimal vehicle of such price randomization is a draw from a discrete two-points probability distribution function. We use the model to offer explanations for observed on-line sellers´ behavior and discuss implementation issues in view of recent e-commerce environments.