Price
discrimination occurs when customers in different market segments are charged
different prices for the same good or service, for reasons unrelated to costs.
Price discrimination is effective only if customers cannot profitably re-sell
the goods or services to other customers. Price discrimination can take many
forms, including setting different prices for different age groups, different
geographical locations, and different types of users (such as residential vs.
commercial users of electricity).
Where
sub-markets can be identified and segmented then it can be shown that firms
will find it profitable to set higher prices in markets where demand is less
elastic. This can result in higher total output, a pro-competitive effect.
Price
discrimination can also have anti-competitive consequences. For example,
dominant firms may lower prices in particular markets in order to eliminate
vigorous local competitors. However, there is considerable debate as to whether
price discrimination is really a means of restricting competition.
Price discrimination is also
relevant in regulated industries where it is common to charge different prices
at different time periods (peak load pricing) or to charge lower prices for
high volume users (block pricing).