Price Discrimination

Businesses use price discrimination to earn more from customers who value a product highly, while still selling to those who would only buy at a lower price.

Common examples include discounts for students and older people, airline tickets that cost more when booked close to departure, cinema tickets that are cheaper in the afternoon, software sold at different prices in different countries, and bulk discounts for large orders.

For example, an airline knows business travellers booking at short notice will pay much more than holidaymakers booking months ahead, so it charges different prices for seats on the same flight.

For price discrimination to work, a business needs some market power, a way to separate customers into groups and a way to prevent customers who buy cheaply from reselling to others. It can increase total output and allow some customers to buy who otherwise could not, but it can also transfer value from consumers to businesses. Some forms may be illegal, for example if based on protected characteristics or if they harm competition.