What does price discrimination involve?

Price discrimination involves dividing consumers based on their willingness to pay, which allows sellers to charge different prices to different groups for the same product or service. This strategy is used to maximize revenue by capturing consumer surplus, which is the difference between what consumers are willing to pay and what they actually pay. By recognizing that different consumers have varying levels of demand or price sensitivity, a company can set higher prices for those willing to pay more and lower prices for those who are more price-sensitive.

For instance, airline companies often charge different fares for the same flight based on how far in advance tickets are purchased or the flexibility of the ticket. This approach contrasts with charging the same price to all consumers, which does not account for the differences in willingness to pay. Setting prices based on production costs does not relate to consumer price sensitivity. Offering discounts to all customers equally also does not effectively target different segments in the same way that price discrimination does, as it does not differentiate based on individual consumer willingness to pay.