Price discrimination

Price discrimination is a seller’s practice of charging different prices for the same good when differences are not explained by cost. It often relies on differences in buyers’ willingness to pay.

Consumer surplus: The difference between what a buyer is willing to pay and what the buyer actually pays. Charging different buyers different prices lets sellers capture portions of this surplus.
Market power: A firm's ability to profitably influence the price or terms of trade in a market. Without market power, competitors can constrain a seller’s ability to set buyer-specific prices.
Airline pricing: The methods airlines use to set fares across routes, dates, and booking conditions. Advance-purchase rules and fare restrictions separate travelers with different price sensitivity.
Two-part tariff: A pricing scheme combining a fixed fee with a per-unit charge. It extracts surplus through price structure rather than necessarily charging different buyers different prices.
First-degree price discrimination: A pricing strategy that charges each buyer the maximum price that buyer is willing to pay. In the idealized case, it transfers consumer surplus to the seller while serving every buyer with positive willingness to pay.
Price elasticity of demand: A measure of how strongly quantity demanded changes when price changes. Sellers can charge more to buyers whose demand responds less to price.
Willingness to pay: The maximum amount a buyer would pay for a good or service. Differences in willingness to pay create opportunities for profitable price variation.
Student discount: A reduced price offered to customers who can verify their student status. It uses an observable status to offer lower prices to a group often assumed more price-sensitive.
Block pricing: A pricing method in which the per-unit price varies with the quantity purchased. Its price variation depends on purchase volume, not necessarily on differences between buyers.
Second-degree price discrimination: A pricing strategy that varies the price per unit with quantity or product version chosen by the buyer. Buyers sort themselves among offers, changing both surplus distribution and purchase patterns.

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