The Theory of Price Discrimination

Price discrimination occurs when a seller charges different prices to different customers for the same product or service, based on factors like willingness to pay, location, or purchase conditions. This strategy aims to maximize revenue by capturing more consumer surplus—extra value consumers are willing to pay but might not pay at a single uniform price. It is only effective when sellers can distinguish between different customer groups and prevent resale. Examples include airline ticket pricing, discounts for students, or region-based pricing. Overall, price discrimination helps businesses optimize profits by tailoring prices to different segments.