Third degree price discrimination

Charging different prices for the same product in segments of the market. Price charged is linked directly to consumers' willingness and ability to pay for a good or service

Third-degree price discrimination is a pricing strategy in which a firm charges different prices to different groups of consumers for the same good or service. This is done by identifying different consumer segments with different price elasticities of demand.

For example, a movie theater might charge students a lower price than adults, because students are more price sensitive. Or, an airline might charge business travelers a higher price than leisure travelers, because business travelers are less price sensitive.

Third-degree price discrimination can be a very effective way to increase a firm's profits. By charging different prices to different groups of consumers, the firm can capture more of the consumer surplus. However, third-degree price discrimination is not always possible. It requires that the firm be able to identify different consumer segments and that it be able to prevent arbitrage, which is the buying of goods at a low price in one market and selling them at a higher price in another market.

Third-degree price discrimination is also controversial, as it can be seen as unfair to consumers. Some people argue that it is wrong for a firm to charge different prices to different people for the same good or service. However, others argue that third-degree price discrimination is simply a way for firms to maximize their profits and that it does not harm consumers.

The legality of third-degree price discrimination varies from country to country. In the United States, third-degree price discrimination is generally legal, as long as the firm does not engage in anti-competitive behavior, such as price-fixing.

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