A Theory of Buyer Fragmentation: Divide-and-Conquer Intensifies Competition

It is well-known from Innes and Sexton (1993, 1994) that divide-and-conquer contracts allow an incumbent facing a potential entrant to extract more surplus from buyers and hence buyers suffer from the strategy. In this paper, we show that when sellers compete by offering personalized non-linear tariffs, divide-and-conquer strategies intensify competition among sellers in the presence of indirect contracting externalities. Therefore, buyers prefer remaining fragmented to forming a buyer group. When buyer group formation is decided before the entry of an entrant, our result implies that buyers may deliberately induce a socially suboptimal entry by remaining fragmented in order to benefit from more intense competition upon the entry.