Question

Explain the concept of third-degree price discrimination. Why do firms use this strategy? Give examples.

Answer 1

Third-degree price discrimination

Third-degree price discrimination is a situation in which buyers segment the market,and then practice price discrimination.It involves buyers offering discounts to members of a certain groups,like seniors,students or military personnel.Some firms also practice price discrimination based on the time of use,like charging different rates through different times of the day.

   Firms use this strategy as it gives them an opportunity to increase their sales,and thus expand their market share.As they segment the markets,they aim at groups which would not otherwise buy the product or use the service.Such a price discrimination is legal as long as the discrimination is not based on racial grounds.Usually third degree price discrimination done on the basis of age group is because students and seniors show high sensitivity to price.Third degree price discrimination does not endanger negative feelings about the seller in the minds of the people who not fall in the segmented group as long as the seller does not charge the other customers to make up to the discounts charged.

Examples of third-degree price discrimination

1)Travel discounts given to seniors or military personnel.

2)Pubs and bars charging different rates at different times of the day.Rates are usually low earlier in the day when the demand is low and higher in the later part.

3)Universities offering fee concessions to students who not financially strong.