• Definition : Individuals in different regions or segments are charged a separate / different price

to each other. 3rd degree PD is based on charging prices according to consumers PED.
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• 3rd degree PD is based on charging prices according to consumers PED.
• The conditions needed for a 3rd degree price discrimination requires:
• a segregation of markets,
• perfect knowledge of consumer preferences,
• prevent resale,
• price making ability.
• For example:
• E.g. A higher price to inelastic markets (travelling to London at peak times)
• and lower price to elastic markets. (e.g. travelling out of London at the weekend).
• Assumptions are made about MC and MR:
• Assume that MC is the same in each market (peak and off peak).
• As shown on the diagram, the firms have two profit maximisation points, (where MC=MR).
• And different prices are set due to the differences in elasticity of demand (AR1 vs AR2)
• What is the resulting level of profit?
• As shown on the diagram, higher profit is earnt from charging two separate prices (P1 vs P2)
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• 3rd degree PD is based on charging prices according to consumers PED.
• The conditions needed for a 3 rd degree price discrimination are a segregation of markets
into sub markets, having perfect knowledge of consumer preferences, preventing resale
and having price making ability
• In train markets there is an ability to segregate the market into sub markets based on
peak and off peak journeys. The peak journeys will have a higher price due to more
inelastic demand such as travelling to London at peak times, whereas there will be a
lower price for elastic markets such as off peak journeys out of London on the
weekend. We assume they have perfect knowledge of consumer preferences allowing
them to split the market into sub markets. Furthermore, they can prevent resale
through the tap in and tap out machines adjusting pricing and only accepting tickets
based on off peak and peak journey hours. Finally, in train markets there is price
making ability as railway lines are monopoly’s as they usually are the sole provider of
a railway line so can discriminate based on price.
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On the diagram, we assume MC=AC across both markets and the cost is constant at C1. Firms will be profit maximisers
meaning they will choose to produce at MR=MC as seen on the diagram which results in a lower price of P1 in the elastic
Off peak market and a higher price in the inelastic peak market of P2.
The combined effect of splitting the market results in a combined higher amount of Supernormal Profits of the
two shaded areas in the diagrams as compared to having one market price for everyone. Therefore, firms in train market
will price discriminate in order to raise profits.
However, the impact of price discrimination will depend on the ability of firms to price discriminate. In order to price
discriminate, there are three conditions which must be met: there must be at least two separate markets which can be
separated, the ability to on sell must be prevented and the firm must have price making power.
The markets are clearly separate (off peak and peak), and the use of tap in and tap out, and travel time specific tickets
means that they can be separated fairly easily based on time of travel, and can prevent on selling.

However, the elasticities may not be that different. Firstly, there are other forms of transport which the consumers may
use and so if peak travellers are charged huge prices then they may decide to go to a different form of transport (cycling,
bus). This will mean that train companies may lose profit due to the price discrimination strategy.

They will also lose out on any other revenue gained, for example sales of on board snacks. Some may argue therefore train
companies should keep prices cheap to encourage people to come and then spend their money on other goods.
Structure
1) Definition
2) Conditions for price discrimination
3) Application of conditions in specific context of the question (e.g:
trains, cinema etc)
4) Diagram (fully labelled)
5) Analysis of Diagram
6) Possible evaluative comments (more for 15 marker, but can add into
9 marker if you have time)