Price Discrimination with Costless Resale

This paper shows that income effects create an endogenous barrier to arbitrage, allowing price discrimination to survive costless resale.A monopolist sells an indivisible good to consumers with heterogeneous incomes who can freely resell.When the good is strictly normal, a consumer's reservation price to resell increases as the purchase price decreases-lower prices leave buyers wealthier and raise their valuation of the good.The monopolist exploits this by subsidising lowincome consumers to raise their reservation prices to a target that high-income consumers must also pay.The optimal schedule increases dollar-for-dollar with income in the subsidised segment, weakly dominates uniform pricing, and achieves the first-best allocation when the entire market is served.We show the mechanism extends beyond income effects: low substitutability with market alternatives generates large reservation-price responses even when income sensitivity is modest.Sustaining discrimination requires market power at the individual level-consumer-specific quantity limits-not merely aggregate output restrictions.Extensions examine multiple monopolists and endogenous privacy choices.