Third-degree discrimination and who gains
| English | 中文 | Pinyin |
|---|---|---|
| third-degree price discrimination | 三级价格歧视 | sān jí jià gé qí shì |
| arbitrage | 套利转售 | tào lì zhuǎn shòu |
A decision you can investigate
- Two identifiable customer groups may face different prices for the same service. Different production costs can also cause price differences.
- Test the mechanism before calling every price difference discrimination.
Build the explanation
- Third-degree price discrimination 三级价格歧视 sets different prices for identifiable markets/groups for reasons beyond corresponding unit-cost differences. It needs enough market power, workable segmentation, limited resale/arbitrage 套利转售 and different demand responses to make differentiated pricing worthwhile. With common MC and separable markets, an interior profit optimum allocates output so MR in each market equals MC; the less price-elastic group tends to pay the higher markup under the model. Price is read from each demand curve, not set equal to MR.
- Higher receipts may cover fixed provision costs, serve a new group or finance quality; some consumers may gain lower prices/access while others pay more. Profit gains do not prove greater total output or welfare. Compare feasible uniform pricing, affected groups, resource costs, segmentation costs and output before judging. Discounts explained entirely by different costs are a different case.
Work through the evidence
- A fictional supplier has demands PA=100−QA and PB=60−QB, common MC20 and fixed economic cost200. Separate MR conditions give QA40/PA60 and QB20/PB40: total output60, receipts2400+800=3200, cost1400 and profit1800. Point PED is−1.5 in A and−2 in B at these choices; the less elastic group A pays more.
- Under a common price50, QA50 and QB10 give the same total60, receipts3000, cost1400 and profit1600. This is the best uniform-price choice when both groups buy: aggregate Q=160−2P gives the profit maximum at P50; serving only A gives at most profit1400 in this case. Consumer surplus under uniform pricing is1250+50=1300; discrimination gives800+200=1000. Profit rises200 but combined firm-profit/consumer-surplus falls100, from2900 to2800, because output is reallocated between groups. Total quantity alone therefore does not settle welfare.
What is discrimination profit?
Receipts3200 less total economic cost1400 equals1800.
Which group pays more in the stated optimum?
A’s elasticity magnitude1.5 is below B’s2, with common MC and the stated model.
Third-degree discrimination always raises total output and social welfare.
Compare with a feasible uniform-price benchmark; output and allocation effects differ across cases.
Test the limits
- The welfare comparison assumes common costs, truthful demand curves, no externalities and no extra segmentation/enforcement cost. Another case can expand total output or keep a high-fixed-cost service viable, so this numerical loss is not a universal result. Resale barriers may be costly, incomplete or ethically contested; school examples should not pretend group labels automatically identify willingness to pay.
- Fixed costs and normal return are included; consumer surplus is not a measure of equal access or every aspect of wellbeing. Group B benefits here while A loses, illustrating distribution. Explain whether price differences reflect cost, product quality or discrimination before applying the MR rule. The hypothetical prices are teaching cases, not advice to implement real group-based pricing.
How does combined profit and consumer surplus change?
Profit rises200 but consumer surplus falls300.
Apply and explain your answer
- Why does greater profit with unchanged total output fail to establish a welfare improvement here?
- The allocation changes from50/10 to40/20. Consumer surplus falls300 while profit rises200, giving a net loss100 under the stated benchmark.
Match the terms to their meanings.
Use each term for its stated economic relationship.
Use the terms precisely
- third-degree price discrimination: Different prices for identifiable groups or markets beyond corresponding cost differences.
- arbitrage: Buying in a lower-price market and reselling in a higher-price market, which can undermine segmentation.
A fictional supplier has demands PA=100−QA and PB=60−QB, common MC20 and fixed economic cost200. Separate MR conditions give QA40/PA60 and QB20/PB40: total output60, receipts2400+800=3200, cost1400 and profit1800. Point PED is−1.5 in A and−2 in B at these choices; the less elastic group A pays more. Under a common price50, QA50 and QB10 give the same total60, receipts3000, cost1400 and profit1600. This is the best uniform-price choice when both groups buy: aggregate Q=160−2P gives the profit maximum at P50; serving only A gives at most profit1400 in this case. Consumer surplus under uniform pricing is1250+50=1300; discrimination gives800+200=1000. Profit rises200 but combined firm-profit/consumer-surplus falls100, from2900 to2800, because output is reallocated between groups. Total quantity alone therefore does not settle welfare.
The welfare comparison assumes common costs, truthful demand curves, no externalities and no extra segmentation/enforcement cost. Another case can expand total output or keep a high-fixed-cost service viable, so this numerical loss is not a universal result. Resale barriers may be costly, incomplete or ethically contested; school examples should not pretend group labels automatically identify willingness to pay. Fixed costs and normal return are included; consumer surplus is not a measure of equal access or every aspect of wellbeing. Group B benefits here while A loses, illustrating distribution. Explain whether price differences reflect cost, product quality or discrimination before applying the MR rule. The hypothetical prices are teaching cases, not advice to implement real group-based pricing.
Third-degree price discrimination sets different prices for identifiable markets/groups for reasons beyond corresponding unit-cost differences. It needs enough market power, workable segmentation, limited resale/arbitrage and different demand responses to make differentiated pricing worthwhile. With common MC and separable markets, an interior profit optimum allocates output so MR in each market equals MC; the less price-elastic group tends to pay the higher markup under the model. Price is read from each demand curve, not set equal to MR.