Third-degree price discrimination is a strategy where a seller charges different prices to distinct consumer groups for the same product based on their willingness to pay or price elasticity of demand
. Commonly used by firms with market power, this approach boosts profits by segmenting markets via demographics (age, student status) or location
.
Key Aspects of Third-Degree Price Discrimination
- Definition: Different prices are set for different groups (e.g., seniors vs. adults) to maximize revenue.
- Mechanism: Groups with more elastic demand (more sensitive to price) receive lower prices, while those with inelastic demand pay higher prices.
- Requirements: Firms must be able to identify segments, have market power (monopoly/oligopoly), and prevent resale of the product between groups.
- Examples:
- Movie Tickets: Lower prices for children and seniors.
- Transportation: Student or military discounts.
- Utilities/Services: Lower rates for residential versus commercial users.
- Impact: Increases overall producer profit, but reduces consumer surplus for those paying higher prices.
