Third degree price discrimination is a type of price discrimination 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. In summary price discrimination

• allows a firm to charge different prices to different consumer groups based upon their price elasticity of demand.
• is easy to implement based upon factors such as age or location.
• allows firms to capture more consumer surplus and turn this into profits
• allows for a more efficient allocation of resources

For example, a cinema might charge students (elastic demand) a lower price for tickets than adults (inelastic demand), because students are more price sensitive. Students typically have less disposable income than adults, so they are more likely to be willing to pay a lower price for tickets.

Third degree price discrimination is straight forward to implement because the firm can identify different consumer segments based on factors such as age, location, or time of purchase however it is important to prevent arbitrage which in this case would be adults purchasing student tickets. To reduce arbitrage ID may be required to prove you are a student at the point of purchase.

Benefits of third degree price discrimination

There are two main benefits to third degree price discrimination.

1. It allows the firm to increase its supernormal profits. By charging different prices to different groups of consumers, the firm can capture more of the consumer surplus. This can be shown in the diagram below where the inelastic market profit combined with the elastic market profit is greater than the profit in the combined market.
2. Third degree price discrimination can lead to a more efficient allocation of resources. This is because the firm is able to match different prices to different consumer segments, which reflects their willingness and ability to pay.

Third Degree Price Discrimination in Economics

Drawbacks of third degree price discrimination 

However, there are also some drawbacks to third degree price discrimination. First, 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.
Second, third degree price discrimination can be difficult to implement. This is because the firm needs to be able to identify different consumer segments and 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.
Overall, third degree price discrimination is a powerful tool that can be used by firms to increase their profits and improve the efficiency of resource allocation. However, it is important to be aware of the potential drawbacks of this type of price discrimination.

Examples of third degree price discrimination

Here are some examples of third degree price discrimination:

• Airlines charge different prices for tickets depending on the time of year and the day of the week.
• Cinemas charge different prices for tickets depending on the age of the customer.
• Software companies charge different prices for their products depending on the country in which they are sold.