Editing Price discrimination (section)

==Theoretical basis==
In a theoretical market with [[perfect information]], [[Substitute good|perfect substitutes]], and no [[Transaction cost|transaction costs]] or prohibition on secondary exchange (or re-selling) to prevent [[arbitrage]], price discrimination can only be a feature of [[monopoly]] and [[oligopoly]] [[Market (economics)|markets]],<ref>("Price Discrimination and Imperfect Competition", Lars A. Stole)</ref> where [[market power]] can be exercised. Without market power when the price is higher than the market equilibrium, consumers will switch to sellers selling at the market equilibrium.<ref name=":12">{{Cite book |last=Marburger |first=Daniel |url=http://dx.doi.org/10.4128/9781606493823 |title=Innovative Pricing Strategies to Increase Profits |
year=2012 |publisher=Business Expert Press |isbn=978-1-60649-382-3 |doi=10.4128/9781606493823|doi-broken-date=23 December 2024 }}</ref> Moreover, when the seller tries to sell the same good at differentiating prices, the buyer at the lower price can arbitrage by selling to the consumer buying at the higher price with a small discount from the higher price.<ref name=":32">{{Cite book |last=Allingham |first=Michael |url=https://www.worldcat.org/oclc/1004672634 |title=Arbitrage : elements of financial economics |date=1991 |isbn=978-1-349-21385-6 |location=London |oclc=1004672634}}</ref>

Price discrimination requires [[market segmentation]] and some means to discourage discount customers from becoming resellers and, by extension, competitors.<ref name=":22">{{Cite book |last=Marshall |first=Alfred |title=Principles of Economics |publisher=Palgrave Macmillan  |year=2013 |isbn=9780230249271 |location=New York}}</ref> This usually entails preventing any resale: keeping the different price groups separate, making price comparisons difficult, or restricting pricing information.<ref name=":32" /> The boundary set up by the marketer to keep segments separate is referred to as a ''rate fence'' (a rule that allows consumers to segment themselves based on their needs, behaviour, and willingness to pay).<ref>{{Cite web |last=Bragg |first=Steven |title=Rate fence definition |url=https://www.accountingtools.com/articles/rate-fences |access-date=2023-04-21 |website=AccountingTools |language=en-US}}</ref> Price discrimination is thus very common in services where resale is not possible; an example is student discounts at museums: Students may get lower prices than others, but do not become resellers, because the service is consumed at point of sale. Another example of price discrimination is [[intellectual property]], enforced by law and by technology.  In the market for DVDs, laws require DVD players to be designed and produced with hardware or software that prevents inexpensive copying or playing of content purchased legally elsewhere in the world at a lower price. In the US the [[Digital Millennium Copyright Act]] has provisions to outlaw circumventing of such devices to protect the profits that copyright holders can obtain from price discrimination against higher price market segments.

Price discrimination attempts to capture as much consumer surplus as possible. By understanding the elasticity of demand in various segments, a business can price to maximize sales in each segment.<ref name=":12" /> When a seller identifies a consumer (or group) that has a lower willingness to pay, price discrimination maximizes profits.<ref>{{Cite journal |last1=Anderson |first1=Eric T. |last2=Dana |first2=James D. |date=June 2009 |title=When Is Price Discrimination Profitable? |url=http://pubsonline.informs.org/doi/abs/10.1287/mnsc.1080.0979 |journal=Management Science |language=en |volume=55 |issue=6 |pages=980–989 |doi=10.1287/mnsc.1080.0979 |issn=0025-1909 |hdl-access=free |hdl=10419/38645}}</ref>