What Price Discrimination Requires

The passenger in 14C paid more than 14D because airlines split travelers by how price-sensitive they are, not by seat quality. Business travelers book late and need that specific flight, so their demand is inelastic: raise the price and they still buy. Leisure travelers book early and can shift to another date, so their demand is elastic: raise the price and they walk. A firm with market power — meaning it faces a downward-sloping demand curve and isn't just taking the market price — can exploit that gap. It needs three things: power to set price above marginal cost, a way to sort buyers into groups with different price sensitivity, and a wall against resale between those groups.

A theater selling $12 adult tickets can offer $8 student tickets without losing money on the adults, because showing a student ID is cheap to check and students generally have tighter budgets and more substitutes for a Friday night. The theater captures students who'd otherwise skip the movie, while adults keep paying $12 since nothing changed for them. That's the whole mechanism: segment the market, charge each segment what it will bear, and prevent the cheap group from reselling to the expensive one.

If resale is open, the scheme falls apart. A student who buys a $8 ticket could scalp it to an adult for $10, undercutting the theater's own $12 price, and the theater loses the adult sale entirely. That's why discrimination schemes lean on things resale can't easily cross: an ID check, a non-transferable ticket, a signature, a service delivered on the spot. This sits right next to the idea that price discrimination raises the firm's profit and can actually expand output beyond what a single uniform price would sell, which connects forward to how deadweight loss shrinks when more low-value buyers get served at a price they'll actually pay.