Definition of Third Degree Price Discrimination
This involves charging a different price to different groups of consumers. These groups of consumers can be identified by particular characteristics such as age, sex, location.
In the real world, third degree price discrimination is quite common. For a firm to practise price discrimination it requires:
- Ability to set prices. Some market power
- Ability to segment different classes of consumers (e.g. rail card to prove you are a senior citizen)
- Ability to prevent resale. E.g. stop adults using student tickets.
Examples of Third Degree Price Discrimination
Students frequently get 10% discount in shops such as HMV and Cinemas.
Pensioners get discounted bus and train tickets.
A nightclub may offer discount to female consumers on certain nights.
Logic of Third Degree Price Discrimination
Why are students given 10% discount? With lower income, students tend to be more sensitive to price elastic. Therefore, by cutting prices for students, a firm may be able to increase sales and revenue.
Note: A variance on price discrimination occurs when firms sell slightly different products. For example, first class tickets are more expensive because the firm can offer a better service. However, first class tickets also take advantage of different elasticities of demand. Businessmen who pay first class will have a more inelastic demand and so willing to pay higher prices to get slightly better product.