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INTRODUCTION
Price Discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. In a theoretical market with perfect information, no transaction costs or prohibition on secondary exchange (or re-selling) to prevent arbitrage, price discrimination can be a feature only of imperfectly competitive markets. Otherwise, the moment the seller tries to sell the same good at different prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price but with a tiny discount. However, market frictions in oligopolies such as the airlines and even in fully competitive retail or industrial markets allow for a limited degree of differential pricing to different consumers. Price discrimination also occurs when it costs more to supply one customer than it does another, and yet the supplier charges both the same price.
Although the term "discrimination" has negative (e.g. racist, sexist) connotations in common usage, the meaning of the word "discrimination" (from discriminatio, "a distinction") is neutral. "Price discrimination" is a technical term meaning only differentiation in price by customer, and is not intended as an accusation of illegal or unethical behaviour.
The effects of price discrimination on social efficiency are unclear; typically such behaviour leads to lower prices for some consumers and higher prices for others. Output can be expanded when price discrimination is very efficient, but output can also decline when discrimination is more effective at extracting surplus from high-valued users than expanding sales to low valued users. Even if output remains constant, price discrimination can redu ...