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 low-income 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.