Segmenting Your Market Based on Willingness to Pay: Third-Degree Price Discrimination Strategies

Third-degree price discrimination exists when different prices are charged to individuals who can be grouped according to their characteristics. The assumption is that price sensitivity and willingness to pay might differ across groups of individuals with readily identifiable characteristics. Examples of third-degree price discrimination include senior citizen discounts, discounts for children, etc. The key distinction between second- and third-degree price discrimination is that, in the former, the market segments cannot be recognized ex ante. Hence, the firm creates a pricing structure that allows buyers to self-select. In contrast, the ...

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