Third-Degree Discrimination

A cinema sells the same seat to the same showing at two prices. An adult pays the full price. A student with an ID pays a discount. Same seat, same showing, same cinema. The difference is who the buyer is.

This is third-degree price discrimination — the most common kind. The firm splits buyers into groups it can tell apart and charges each group its own price. Students, seniors, members, frequent fliers, residents of country X — any visible label that signals “this buyer values the product differently” can become a pricing tier.

The rule is short. Treat each group as its own little market with its own demand curve. Set $M R = M C$ inside that group. The group whose demand is less responsive to price — the less elastic group — ends up with the higher markup. Buyers who can’t walk away pay more.

The same profit-max rule, applied inside each group. The marginal costs match across groups (one firm, one production process); the prices do not.

Worked Example

The cinema sells to two groups. Adults: $P_{A} = 80 - 4 Q_{A}$ (steep demand — adults will pay up). Students: $P_{S} = 50 - Q_{S}$ (flatter — students walk away if it gets too expensive). $M C = 10$ dollars per seat. Find the optimal price and quantity for each group.

Interactive — Movie tickets — does the student discount raise profit?

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Two groups, one cinema. The toggle switches between charging everyone the same price and offering a student discount. Watch the profit number.

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What conditions must hold for third-degree price discrimination to work?

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Third-degree price discrimination:

Under third-degree price discrimination, the monopolist charges a higher price to the group with:

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