Price discrimination can occur in two ways. Firstly, a firm can charge a consumer different prices for different units of consumption. For instance, $10 for the first 5 music CDs and $4.99 for each additional CD (plus shipping and handling of course). Firms with market power use multi-part pricing schemes to try to capture consumer surplus and therefore increase their producer surplus.

Secondly, a firm may segment its market into two or more groups of consumers on the basis of their elasticity of demand for the firm's product. Then to maximize profit the firm sets the prices offered to the groups such that the marginal revenue from each group is the same. For instance, airlines offer higher fares to the group of travellers who have inelastic demand (business air travelers) and lower fares to those with elastic demand (vacation travelers). The marginal costs are the same for each group, so to maximize profit, the marginal revenues from each group should be equated. But this means that they are charged different prices (because their marginal revenue curves have different slopes). The firm must be able to prevent the groups from exchanging the product to conduct this type of price discrimination effectively.