What is price discrimination?

Price discrimination refers to the practice of charging different prices to different customers for the same good or service, where the pricing differences are not based on variations in the cost of production. This strategy is employed to maximize revenue by capturing consumer surplus—that is, the difference between what consumers are willing to pay and what they actually pay.

For example, airlines often implement price discrimination by charging different fares for the same seat on a flight. Factors such as the time of booking, the flexibility of the ticket, or customer demographics can influence the price. This means that two individuals could purchase the same flight but pay different amounts based on these varying factors.

In contrast, selling a good or service at the same price for all buyers does not reflect price discrimination, as it treats all customers uniformly without consideration of their willingness to pay. Offering discounts based on quantity purchased is a different strategy, often referred to as volume discounting, which is not classified as price discrimination, as it relates to the amount being purchased rather than differences between individual customers. Providing free products to certain customers is also unrelated, as it involves a drop in price to zero without the nuances of selective pricing based on individual attributes or characteristics.

Thus, the essence of price discrimination lies in the ability to strategically