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Price Discrimination Types & Examples

Jeremy Cook, Tara Schofield
  • Author
    Jeremy Cook

    Jeremy taught elementary school for 18 years in in the United States and in Switzerland. He has a Masters in Education from Rollins College in Winter Park, Florida. He's taught grades 2, 3, 4, 5 and 8. His strength is in educational content writing and technology in the classroom

  • Instructor
    Tara Schofield

    Tara received her MBA from Adams State University and is currently working on her DBA from California Southern University. She spent 11 years as a sales and marketing executive. She spent several years with Western Governor's University as a faculty member. Tara has been at Study.com for seven years.

Read a price discrimination definition, understand the types of price discrimination, learn about the three degrees of price discrimination, and explore examples. Updated: 12/12/2021

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What is Price Discrimination?

It's a common experience for people to learn that they paid a significantly different price for a product or service than someone else. Chris' neighbor paid $35,000 for his new car. Chris bought the same car at the same dealership, but he paid $36,500. This type of discrepancy is known as price discrimination.

What is price discrimination? The price discrimination definition is when a seller charges different prices to different consumers based on what price they think the consumer will actually accept. The purpose of price discrimination is to increase profits through prices without making a wholesale price change.

Is price discrimination legal and ethical? Yes, and it's much more common than one might think. For example, any bar that has ladies' night is using price discrimination to attract women to the bar. Men pay full prices while women get a discount.

For another example, if a car dealership is selling the newest model SUV and advertises the price starting at $36,000. Any customer that comes in will expect to pay at least $36,000 but might pay more. The dealer has the ability to move the price based on the customer and the dealer's perception of what the buyer is willing to pay.

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Types of Price Discrimination

What are the types of price discrimination? Depending on how the seller is pricing the good or service in relation to the customer defines the type. The types are listed in degrees of price discrimination. The degrees rise from first to third degrees, with third-degree containing the type of price discrimination that is most targeted to the consumer.

First Degree

First degree price discrimination is when a seller decides to charge the highest possible price for a good and then adjust that price down based on the individual consumers. This type of discrimination is considered first-degree because it evens the playing field for consumers at the start. No one individual or group pays more than the advertised price.

  • Pros - Higher chance more buyers will accept the high price, consumers can negotiate down
  • Cons - High starting price might keep certain buyers away, buyers may not know or be willing to negotiate.
  • Example - A retail clothing store charges full price for its suit jackets. If the customer wants to get a lower price, the store offers a special discount.

Second Degree

Just like a second-degree burn is more painful and damaging, second-degree price discrimination is more targeted. Second degree price change is when a seller changes price depending on the quantity. Even though this is a higher degree of discrimination, it is actually very common. When a seller gives a bulk discount, that is second-degree price discrimination.

  • Pros - Consumers get a discount when they buy more. Sellers move more quantity of supply of a product.
  • Cons - Requires buyers to spend more. *Lowers overall price per unit.
  • Example - A grocery store is selling 12 packs of soda for $5.99 each. They have a special discount of 3 for $12 that only applies when three or more 12 packs are purchased.

This store is participating in second-degree price discrimination because the price changes with the quantity that the consumer buys.

Soda shelf in a convenience store with a buy one, get one free advertisement.

Third Degree

The most targeted of price discrimination in the third degree. Third-degree price discrimination is when a seller changes prices based on consumer groups. Those groups could be based on many different attributes. Consumer groups might be generational, age, gender, religious affiliation, or have an organizational affiliation. This is the most controversial type of price discrimination because it is much more targeted to a specific group of people. But even though this seems illegal, third-degree price discrimination is quite common and most people have probably taken part in it.

  • Pros - Some consumers get a discount based on their group. Sellers can try to get the average price of the good where they want it.
  • Cons - Many consumers will not get a discount and some will pay more. Sellers may get a bad reputation if the price discrimination is too targeted or extreme.

Third-degree is the most targeted and varied of the three degrees, therefore it needs a couple of examples.

  • An employee of a mall gets a 10% discount at all the stores in the mall.
  • A senior citizen pays less for a cup of coffee at a restaurant.
  • A driver pays a higher insurance rate because they received a speeding ticket.

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Frequently Asked Questions

What is an example of price discrimination?

Price discrimination happens everywhere and most times people don't even realize it's happening. When a shopper is in a store and the advertised discounts are available to people who have signed up for a store card, they are witnessing price discrimination.

What are the four types of price discrimination?

The categories are:

  • Complete discrimination occurs when the prices for each good are all different.
  • Direct segmentation is when a price is based on a specific characteristic like an age group or gender.
  • Indirect segmentation is when a seller indirectly relies on a condition to determine price change. Having a coupon or company affiliation is an example.
  • Uniform pricing is when the seller sets the price and that price is uniform across buyers.

What is the importance of price discrimination?

Price discrimination is a commonly occurring sales tactic seen throughout most marketplaces. Price discrimination can occur for a plethora of reasons which can be based on buyer characteristics, affiliations, and quantity of goods.

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