Price Discrimination

Price discrimination occurs when a firm charges different prices to different consumers (or in different markets) for the same or similar product, where the price differences are not justified by cost differences. It is a strategy used by firms with market power to increase their revenue and profit by extracting more consumer surplus.

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Conditions for Price Discrimination

For price discrimination to be possible, three conditions must be met:

Condition	Explanation	Why It Matters
Market power	The firm must be a price maker — it must face a downward-sloping demand curve	A perfectly competitive firm cannot price-discriminate because it must accept the market price
Ability to separate markets	The firm must be able to identify and separate groups of consumers with different price elasticities of demand	If consumers can easily resell the product between themselves (arbitrage), price discrimination breaks down
Different price elasticities	Different consumer groups must have different willingness to pay (different PED)	If all consumers have the same elasticity, there is no benefit from charging different prices