Theories of Price Discrimination

Price discrimination is when a seller charges different prices to different customers for the same product, based on their willingness or ability to pay. Theories behind this practice suggest that businesses do this to maximize profits by capturing more consumer surplus—extra value that consumers are willing to pay. It relies on segmenting customers into groups with differing price sensitivities and preventing resale between them. Effective price discrimination increases revenue, as it allows firms to serve a broader market while extracting more consumer willingness-to-pay from each group. This strategy is common in industries like airlines, movie theaters, and software.