Variable Pricing by Market Segment/ Third Degree Price Discrimination

This is the most frequent price discrimination and involves charging different prices for the same product in segments of the market. Third degree discrimination is linked directly to consumers’ willingness and ability to pay for a good or service. It means that the prices charged may bear little or no relation to the cost of production.

This is an example of third-degree price discrimination and refers to the practice of charging different prices in different stores, markets, regions, or zones usually in response to different competitive situations in their various markets.

In the real world, third-degree price discrimination is quite common. For a firm to practise price discrimination it requires:

• Ability to segment different classes of consumers (e.g. rail card to prove you are a senior citizen)
• Ability to set prices. Some market power.
• Ability to prevent resale. E.g. stop adults using student tickets.

Direct price discrimination

Third degree price-discrimination is sometimes known as direct price discrimination. Because a firm directly sets different prices depending on distinct groups of consumers (e.g. age)

The alternative is indirect price discrimination where consumers can choose depending on their behaviour, e.g. bulk buying gets lower average cost.

Two Part Pricing Tariffs

• Another pricing policy is to set a two-part tariff for consumers.
• A fixed fee is charged + A supplementary “Variable” charge based on units consumed.
• Examples: taxi fares, amusement park charges
• Price discrimination can come from varying the fixed charge to different segments of the market and in varying the charges on marginal units consumed (e.g. discrimination by time).

Product-line pricing

• This occurs when there are many closely connected complementary products that consumers may be enticed to buy. It is frequently observed that a producer may manufacture many related products.
• They may choose to charge one low price for the core product (accepting a lower mark-up or profit on cost) as a means of attracting customers to the components / accessories that have a much higher mark-up or profit margin.
• Examples: manufacturers of cars, cameras, razors and games-consoles
• Discriminatory pricing techniques may take the form of offering the core product as a “loss-leader” (i.e. priced below average cost) to induce consumers to then buy the complementary products once they have been “captured”.