The Economics of Price Discrimination

Price discrimination occurs when a seller charges different prices to different customers for the same product, based on willingness to pay. This strategy allows businesses to maximize profits by capturing more consumer surplus—money customers would be willing to pay but don’t—by tailoring prices to different segments. For example, charging students less than professionals, or offering discounts for bulk purchases. While it can benefit both sellers and consumers by increasing accessibility and efficiency, it requires careful segmentation and information about customers. Overall, price discrimination reflects an attempt to better match prices with consumers' valuation, leading to more efficient market outcomes.