🔍 Definition:
Price discrimination refers to a pricing strategy where a seller charges different prices to different consumers for the same product, not based on cost differences but on differences in willingness to pay.

Example: A software company charges lower prices to students than to corporate clients for the same software.

✅ Essential Conditions for Successful Price Discrimination

For price discrimination to be successful, a firm must satisfy three essential conditions across different markets:

1. Market Segmentation

The firm must be able to divide the market into distinct groups of consumers based on differentiated characteristics such as age, location, or income.

• Examples of segmentation could be student discounts, senior citizen discounts, or location-based pricing.

• Different consumer segments must exhibit varying willingness to pay, ensuring that each group can be charged a different price.

2. Different Elasticities of Demand

The firm must identify that different consumer groups have different price elasticities of demand.

• For example, students may be more price-sensitive (higher elasticity) than business travelers, who may be willing to pay more (lower elasticity) for the same product or service.

• This allows the firm to charge higher prices to less price-sensitive consumers and lower prices to more price-sensitive consumers.

3. Prevention of Resale (No Arbitrage)

There must be no possibility of resale between consumers in different segments.

• If consumers who buy at a lower price can resell to those who face higher prices, it undermines price discrimination.

• This condition ensures market segments remain isolated, allowing the firm to maintain different prices for different groups.

4. Market Power / Monopoly Element

The firm must have some degree of market power, enabling it to act as a price maker, rather than a price taker.

• In a perfectly competitive market, firms cannot charge different prices; they are forced to accept the market price.

• A firm needs to be able to set prices independently, which usually requires a monopoly or monopolistic competition structure.

💡 Examples of Price Discrimination:

• Movie theatres offering student and senior discounts.

• Airlines charging different fares based on booking time and flexibility.

• Software companies offering lower prices in developing countries.