Student Discounts & Geographic Segmentation: Third-Degree Price Discrimination Examples

📚 Third-Degree Price Discrimination: A Quick Study Guide

• 🌍 Definition: Third-degree price discrimination involves charging different prices to different groups of consumers based on their characteristics (e.g., age, location).
• 🍎 Student Discounts: Offering lower prices to students, who generally have a higher price elasticity of demand.
• 📍 Geographic Segmentation: Charging different prices in different geographic markets based on local demand and competition.
• 📝 Conditions:
  • 👥 Market segmentation is possible and cost-effective.
  • 🚫 No resale between segments (preventing arbitrage).
  • 📉 Different segments have different price elasticities of demand.
• 📐 Profit Maximization: The firm maximizes profit by setting marginal revenue equal to marginal cost in each segment ($MR_1 = MR_2 = MC$).

Practice Quiz

1. Which of the following is the BEST example of third-degree price discrimination?
   1. A) A coffee shop charges the same price for coffee all day.
   2. B) A movie theater offers discounted tickets to students.
   3. C) A grocery store offers coupons to all customers.
   4. D) An airline charges the same price for all seats on a flight.
2. Why do companies offer student discounts as a form of price discrimination?
   1. A) Students have a lower price elasticity of demand.
   2. B) Students have a higher income than other consumers.
   3. C) Students are easier to target with advertising.
   4. D) Students generally have a higher price elasticity of demand.
3. Geographic segmentation in price discrimination involves:
   1. A) Charging the same price in all locations.
   2. B) Charging different prices based on the time of day.
   3. C) Charging different prices based on the customer's age.
   4. D) Charging different prices in different geographic markets.
4. What is a necessary condition for third-degree price discrimination to be successful?
   1. A) Resale between market segments is easy.
   2. B) Market segments have the same price elasticity of demand.
   3. C) Market segmentation is possible and cost-effective.
   4. D) The company has no market power.
5. A company sells a product in two different regions. In region A, the price elasticity of demand is -2, and in region B, it is -4. To maximize profit, the company should:
   1. A) Charge the same price in both regions.
   2. B) Charge a higher price in region A.
   3. C) Charge a higher price in region B.
   4. D) Offer discounts only in region A.
6. What does $MR_1 = MR_2 = MC$ represent in the context of third-degree price discrimination?
   1. A) Cost minimization.
   2. B) Revenue maximization.
   3. C) Profit maximization across all segments.
   4. D) Market equilibrium.
7. Which of the following scenarios is LEAST likely to be an example of third-degree price discrimination?
   1. A) A software company charges less for educational licenses.
   2. B) A car dealership negotiates different prices with different customers.
   3. C) A pharmaceutical company sells a drug at different prices in different countries.
   4. D) A museum offers free admission to seniors on Tuesdays.