Price discrimination occurs when a firm in an imperfect market sells the same good at different prices to different consumers. The advantage for the firm is that they can earn higher revenue for any given level of sales, and in turn higher profits.

The case of third degree price discrimination is where consumers are grouped into two or more independent markets and different prices. The markets may be separated by time, place or income. Examples include a child and adult fare on public transport, first and economy class on an airplane, different tariffs on mobile telephones, classified by time of day or the network being connected too.

There are some necessary conditions for price discrimination to operate successfully;

• The firm must be able to set the price (imperfect market with high barriers to entry)
• The markets must be separate (there must no opportunity for people to re-sell goods to the consumers in the other market)
• The demand elasticity of demand must be different between the markets.

Interestingly, the use of third degree price discrimination may or may not be in the interest of the consumer. For instance;

What does the firm do with the profit?

The higher profit maybe reinvested to improve the quality of the product. If this occurred then the consumer would gain. However, if the higher profit was redirected to higher shareholder dividends then the consumer would loss.

There are now two prices?

The consumer in the lower priced market may gain by paying a lower price than previously. However, the consumer in the higher priced market may loss out as the price is higher than if the firm did not price discriminate.