Price discrimination is charging different customers different prices for the same good or service, unrelated to cost. Learn the three conditions a firm needs, the three degrees (first-degree or perfect, second-degree by quantity, and third-degree by group), and real examples like airline fares and student discounts.
What price discrimination is
Price discrimination is the practice of charging different customers different prices for the same good or service, when those price differences do not reflect differences in cost. A firm does this to capture more of the value buyers place on a product, turning consumer surplus into extra revenue. It is most associated with firms that have market power, such as a monopoly.
The three degrees of price discrimination: by individual, by quantity, and by group.
Conditions required
Price discrimination only works when three conditions hold: the firm has some market power (it is a price setter, not a price taker); it can separate customers into groups with different willingness to pay; and it can prevent resale between those groups, so cheap buyers cannot resell to expensive ones.
The three degrees
First degree (perfect): each buyer is charged the maximum they are willing to pay, capturing all consumer surplus.
Second degree: price varies with the quantity or version bought — bulk discounts, or tiered product versions.
Third degree: different identifiable groups pay different prices, such as student, senior, or regional pricing.
How it relates to monopoly pricing
A single-price monopoly must lower its price for everyone to sell more, which limits output. Price discrimination lets the firm avoid that trade-off. Comparing it with how a single-price monopoly sets price and output shows why discriminating raises the firm's revenue, and the link to marginal revenue and elasticity explains which customers get charged more.
Examples
Airline tickets that cost more when booked at the last minute (second/third degree).
Student and senior discounts at cinemas (third degree).
An auction or individualized negotiation approaching first-degree pricing.