The Consumer Surplus and Price Discrimination

In order to price discriminate, sellers must be able to identify and separate different groups of customers. This requires not so much scientific knowledge as it does the special knowledge of time and place, a form of know-how of great significance to any society's allocation of resources. A pricing system depends on this tacit knowledge in order to allocate resources to those who value them the most. Although this type of knowledge may be unscientific in the technical sense, it is certainly valuable to any business trying to formulate its pricing strategy. Understanding that not all customers are created equal and segmenting them into different groups in order to offer various value propositions based on their ability and willingness to pay is an essential component of pricing on purpose.