Price Discrimination
A pricing strategy in which a seller with market power charges different prices to different buyers for the same good or service.
What is Price Discrimination?
Price discrimination occurs when a firm charges different prices to different consumers or market segments for identical or similar products, based on their willingness to pay, rather than differences in production costs. First-degree (perfect) price discrimination captures all consumer surplus by charging each buyer the maximum they would pay. Second-degree discrimination uses quantity discounts or tiered pricing as buyers self-select. Third-degree discrimination segments buyers by observable characteristics such as student status, age, geography, or time of purchase. Successful price discrimination requires the seller to hold market power, the ability to identify and separate buyer segments, and a way to prevent arbitrage (resale between segments). It is prevalent in airlines, pharmaceuticals, software, streaming services, and higher education.
Example
An airline practices third-degree price discrimination: the same economy seat from New York to London costs $350 booked eight weeks in advance by a leisure traveler, $700 booked two weeks out, and $1,400 at the gate — each segment has different price elasticity and the airline prevents resale by tying tickets to passport names.