Parties allow up to six people to play together. You can create or join public parties by clicking on the Notice Board in town, or by pressing S to open the Social window. You can also invite someone to a party by selecting a player's name in chat, clicking on them in town, or typing /invite playername in the Chat Console.
Effect on Monsters
Monsters gain extra life for each additional party member after the first: 20% in Normal, 40% in Cruel, and 60% in Merciless. The original life amount is used for the purposes of determining the length of Stuns and Status Ailments from Elemental Damage - this means monsters will not be harder to stun/freeze/etc when fighting in a party.
Effect on Loot
All party members share the same quantity modifier.  Players add their item quantity modifiers together and any modifiers from maps, and each player after the first adds a bonus +10% Increased item quantity and 40% Increased item rarity to the party. (For Gems and Currency items, party members add 50% Increased item quantity and 0% Increased item rarity.) Increased item rarity modifiers are only counted from the player who lands the killing blow.
Effect on Experience
Experience is split between all members in the party; the amount you receive depends on your level relative to party members and monsters. The usual experience penalty that can come from monster level applies, but experience is also redistributed to higher level characters. This is intended to balance the high experience requirements at higher levels.
Each player's "share" of the experience gained is (CharacterLevel+10)^2.71. divided by the total of all players' shares. Only party members actually in an area count toward getting XP. Party members in town will not receive experience. For example, if a level 10 player was partied with a level 30 player:
Level 10 player's share: (10+10)^2.71 = 3355
Level 30 player's share: (30+10)^2.71 = 21957
Total Shares: 3356 + 21957 = 25313
Level 10 player would receive: 3355/25313 = 0.132 = 13.2% of the XP
Level 30 player would receive: 21957/25313 = 0.867 = 86.7% of the XP
The player also suffers a penalty to XP if they are too far above or below an area's monster level. There is a safe level range where no penalty is applied, which is equal to three, plus one for every sixteen complete player levels. Any additional level difference outside of this safe range is called the Effective Difference.
The formula then applied is:
PercentOfExperienceGained = ((PlayerLevel +5)^1.5) / ((PlayerLevel+5+(EffectiveDifference^2.5))^1.5)
So a level 24 character has a safe band of 3+1=4 levels. From Monster level 20 to 28, there is an effective level difference of 0. At Monster Levels 19 and 29, the Effective level difference is 1. The Effective Difference matters in either direction.
Finally, being in an area with a party member grants you no experience bonus. Experience is only shared with other players who are near you (roughly two screens of distance). Monsters are always made harder by players anywhere on the level, so players are encouraged to stay together.
Effect on flasks
Party members of a character landing the killing blow on an enemy will gain Flask charges if they are near by. This is not true for all +Life and +Mana gained "when you deal a killing blow" modifiers; only a character actually landing a killing blow will trigger those effects.
It is unclear if flasks still have a +75% charge recovery bonus for each party member after the first. If this mechanic is still in the game, members of a full party would gain 375% more flask charges from killing monsters.
- Mark_GGG (March 9, 2014). "Flask charges in party". Official Path of Exile Forums. Retrieved March 18, 2014.