Third-Degree Price Discrimination

Third-degree price discrimination is segment-based pricing: the monopolist observes which group a consumer belongs to (student vs business, weekday vs weekend, domestic vs international) and sets a separate price in each segment. Within each segment $i$ the standard monopoly condition holds, $MR_i = MC$, so the pricing rule

applies segment by segment. The segment with less elastic demand pays the higher price.

type: price-discrimination-3rd
a1: 100
b1: 1
a2: 80
b2: 2
mc: 50
name1: Segment 1 (less elastic)
name2: Segment 2 (more elastic)

When to use

Third-degree PD is the workhorse exam example for observable type segmentation. Standard setup: $MC$, two linear demand curves $P_1 = a_1 - b_1 Q_1$ and $P_2 = a_2 - b_2 Q_2$ → solve each $MR_i = MC$ separately. The arbitrage-prevention requirement matters: the cheap segment must not be able to resell to the expensive segment, otherwise the price differential collapses.