The damage of players depend on 3 things:
It is used mainly for healing. (Health/Mana)
Because players vs players damage reduced by 50% 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.