The damage of players depend on 3 things:
It is used mainly for healing. (Health/Mana)
Because players vs players damage reduced by 40% and this is kind of damage balance.
It works on the target damage reduction.
(Ex. If you have 20% damage penetration and your target has 30% damage reduction, it means that you removed 20% of his damage reduction "his new damage reduction = 10%" with every hit)
Note:
Having damage penetration and target doesn't have damage reduction won't increase your damage. Damage penetration removes from target damage reduction.
Right click on your character or others, you will see inspect.