What is 'Price Discrimination'?

Price discrimination is a pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the seller charges each customer the maximum price he or she will pay. In more common forms of price discrimination, the seller places customers in groups based on certain attributes and charges each group a different price. For example, in Public Distribution System (PDC) ration is provided at different price to the peoples belong to Above Poverty Line (APL) and Below Povery Line (BPL). Similarly, a bottle of cooking gas is provided to poor families at subsidise rate while rich and reastaurents are charged higher price of the same bottle. 

Price discrimination is most valuable when the profit from separating the markets is greater than profit from keeping the markets combined. This depends on the relative elasticities of demand in the sub-markets. Consumers in the relatively inelastic sub-market pay a higher price, while those in the relatively elastic sub-market pay a lower price. Price discrimination is also based on the attributes (like class, level, limited edition and special edition etc.) available to the consumers. For example, in Air Lines, the last minutes travelers pay higher price for a seat in comparison to the travelers who plan their journey in advance. 

The company identifies different market segments, such as domestic and industrial users, with different price elasticities. Markets must be kept separate by time, physical distance and nature of use. The company must also have monopoly power to make price discrimination more effective as seen in the oil & fuel market in India.