What is Third degree price discrimination?
Third degree price discrimination refers to the strategy adopted by sellers to offer different prices to different groups of buyers for the same product or service.
The buyers in each group share some common features. For example, they could be of the same nationality, same religion, same sex, same age group, etc.
The difference between buyers in different groups creates a price elasticity of demand that is unique. If a group of buyers is found to reduce buying the amount of what the seller sells to a large extent if the price is raised, they can be offered a lower price. For groups of buyers that are not influenced that much by the price, it can be kept higher.
Third degree price differentiation requires that the seller has sufficient control over the market to be able to decide the prices that have to be accepted by the buyers. The seller should also be able to identify groups with distinct characteristics. The separate groups formed should not be able to transact among themselves, else the group that is being charged a higher price would buy from the group that is being charged a lower price.
Third degree price discrimination is used primarily to use the difference in price elasticity of demand of different buyers and boost revenue.