Perfect price discrimination is a pricing strategy where a seller charges each customer the maximum price they are willing to pay. This approach allows the seller to capture all consumer surplus, converting it into profit. While challenging to implement in practice, it can lead to efficient market outcomes by eliminating deadweight loss, which occurs when trades that could benefit both consumers and producers do not happen.

In a typical monopoly scenario, a single price is charged to all customers, leading to a situation where the quantity produced is determined by the point where marginal revenue equals marginal cost. The price is set according to the demand curve, resulting in a profit area that is the difference between the price and average total cost. However, this setup also creates consumer surplus, which is the area above the price and below the demand curve, and a deadweight loss, representing the lost economic efficiency due to restricted output.

In contrast, under perfect price discrimination, the seller can charge each customer according to their willingness to pay. For instance, if one customer is willing to pay $20 and another $19.99, the seller charges them exactly those amounts, maximizing profit. This method allows the seller to produce up to the efficient quantity, where all potential trades occur, thus eliminating deadweight loss. The only scenario where a monopoly can achieve efficiency is through perfect price discrimination.

A real-world example of this concept can be seen in Google AdWords. Google auctions keywords to advertisers, allowing them to bid based on their maximum willingness to pay for ad placement. This auction system ensures that the ad space goes to the highest bidder, effectively matching the ad to the consumer who values it the most. While this method is efficient, it raises ethical concerns as it eliminates consumer surplus, leaving consumers with no benefit from the price differences.