Price Discrimination: What It Is, Types, and Examples

Clearing Up Concepts: Price Discrimination vs. Personalization

Before we dive deeper, it's crucial to distinguish between two terms that are often confused but operate on different scales. Mastering this difference is the first step toward designing a sophisticated pricing strategy.

• Price Discrimination: This applies to segments or groups of customers who share common characteristics. The price is the same for everyone within a group but differs between groups. For example, offering a student discount or having different prices for app users versus website users.
• Price Personalization (or 1-to-1 Pricing): This goes a step further. It involves setting a unique, specific price for an individual user based on their real-time behavior, such as Browse history, past purchases, or items added to their cart. It is a more technologically complex and demanding technique.

While personalization is the horizon, segment-based price discrimination is the most widespread, effective, and accessible strategy for most retailers and brands today.
 

The 3 Degrees of Price Discrimination: The Theoretical Core

To fully grasp this strategy, it's essential to understand the classic classification developed by British economist Arthur Pigou in the early 20th century. These three degrees describe the levels of perfection with which a company can align its prices with its customers' willingness to pay.

1. First-Degree (or Perfect) Price Discrimination

First-degree price discrimination is the theoretical ideal where a company manages to charge each customer the absolute maximum price they are willing to pay for a product. This allows the company to capture the entire consumer surplus. In practice, it is extremely difficult to implement on a large scale.

Common Examples:

• Auctions: Both online (like on eBay) and in-person, the final price is the maximum the winning bidder is willing to pay.
• Haggling: When buying a car or at a traditional market, the seller tries to determine the buyer's maximum price through negotiation.
• Professional Services: A consultant or lawyer might adjust their fees based on the financial capacity and urgency of each client.

2. Second-Degree Price Discrimination (by Volume or Block)

More straightforward and common, second-degree price discrimination involves varying the unit price based on the quantity or volume consumed. The core idea is: the more you buy, the less you pay per unit. It doesn't differentiate between customer types, but by the amount they purchase.

Clear Examples:

• Quantity Discounts: A B2B supplier offering a lower price per unit for orders over 1,000 units.
• Usage-Based Software Tiers: Tools like Mailchimp or Stripe offer different plans with pricing that adjusts based on the number of contacts or transaction volume.
• Utilities: Electricity or water rates are often structured in blocks, where the price per kWh or cubic foot increases as consumption thresholds are passed.

3. Third-Degree Price Discrimination (by Segmentation)

This is, by far, the most common form of price discrimination in retail and e-commerce. It involves dividing the market into different consumer segments and assigning a specific price to each. The segmentation is based on observable attributes that often correlate with willingness to pay or demand elasticity.

Practical Examples:

• By Customer Type: Discounts for students, seniors, new users, or members of a loyalty program.
• By Sales Channel: Different prices in the physical store, on the website, or in the mobile app.
• By Geography: Different prices for domestic vs. international markets, or even between different cities or states.
• By Product Version: Airline tickets in economy vs. business class, or software licenses with Home and Pro versions at different prices.

Implementing these models is a fundamental part of any pricing strategy that aims to go beyond cost-plus or simple competitor-based pricing.

Is Price Discrimination Legal in E-commerce?

This is the key question for any manager, and the direct answer is: yes, price discrimination is a legal practice, as long as it is not based on legally prohibited criteria that discriminate against protected classes (such as race, gender, religion, or national origin).

• In the USA, B2B price discrimination is governed by laws like the Robinson-Patman Act, which targets anti-competitive practices, but B2C price discrimination is largely permissible when based on commercial factors.
• In the UK and EU, regulations like the EU Geo-Blocking Regulation (2018/302) combat unjustified geographic blocking but explicitly allow price differentiation between countries or for specific customer groups.
• A more recent and impactful piece of legislation in Europe is the Omnibus Directive. It's crucial to understand that this directive does not prohibit price discrimination. What it demands is maximum transparency. Its main implication is that when announcing a price reduction, it is mandatory to display the lowest price the product had during the previous 30 days. Learn more about Omnibus Directive.

The conclusion is that the key to a legal and ethical price discrimination strategy lies in transparency and the use of legitimate, objective, commercial segmentation criteria.
 

How to Implement a Price Discrimination Strategy with Technology

Turning theory into tangible results requires a structured approach and the right tools. Applying these rules manually to a catalog of hundreds or thousands of products is simply not feasible.

Step 1: Identify Segmentation Opportunities 

Start by analyzing your customer base and sales channels. Ask yourself questions like:

• Can I differentiate between new visitors and repeat customers?
• Do I have app users and website users I can treat differently?
• Do I sell to both end consumers (B2C) and businesses (B2B)?
• Are there significant differences in purchasing power or buying behavior between different geographic regions?

Step 2: Define Your Pricing Rules 

Once you've identified your segments, assign specific pricing rules. For example:

• Segment: New users. Rule: 10% discount on the first purchase.
• Segment: Loyalty program members. Rule: Permanent 5% discount store-wide.
• Volume (2nd Degree): Buy 3 or more items from the "accessories" category. Rule: 15% discount on those products.

Step 3: Use an Advanced Dynamic Pricing Tool 

This is where technology becomes indispensable. A dynamic pricing platform allows you to automate the application of all these complex rules in real-time.

Mini Case Study 

Imagine an electronics e-commerce store wants to implement a sophisticated pricing strategy. This is where Reactev, Minderest's Dynamic Pricing tool, comes into play.

For third-degree discrimination, the e-commerce store can configure the mobile app and website as two distinct sales channels. Reactev will analyze demand and competition for each channel and generate optimized price suggestions. For instance, it might suggest a price of $999 for a laptop on the website, while for the app channel, it proposes a price of $949 to incentivize its use.

Simultaneously, for second-degree discrimination, the strategy is rounded out with volume offers. For example, a "10% discount when buying 3 or more phone cases" can be applied. This promotional rule is managed from the e-commerce platform, complementing the base price optimized by Reactev to build the final offer the customer sees.

This type of software is the engine that allows you to execute not only segmentation but also other advanced rules. Learn more in our guide to Dynamic Pricing.

Frequently Asked Questions (FAQ) about Price Discrimination

What is meant by price discrimination? 

Price discrimination is a business strategy of selling the same product or service at different prices to different groups of consumers. The goal is to align the price with each segment's willingness to pay to maximize revenue.

What are the 3 types of price discrimination? 

The three types are:

• First-Degree (Perfect): Charging each customer their maximum price (e.g., auctions).
• Second-Degree (by Volume): The price per unit decreases as you buy more (e.g., bulk discounts).
• Third-Degree (by Segmentation): Different prices for different groups (e.g., student discounts).

Is price discrimination legal? 

Yes, it is legal as long as the segmentation is not based on protected characteristics (like race, gender, etc.) and complies with transparency regulations, such as the Robinson-Patman Act in the USA  and the Omnibus Directive in the EU/UK which governs the announcement of price reductions.

What's the difference between price discrimination and dynamic pricing? 

Price discrimination is a segmentation strategy (the "what" and "why"). Dynamic pricing is the technology that allows you to execute that strategy (along with other rules based on competition, stock, or demand) automatically and in real-time.
 

Conclusion: Smart Pricing for a Competitive Retail Landscape

We've broken down what price discrimination is, its theoretical foundations, its legal framework, and most importantly, its practical application. Far from being an abstract concept, it is one of the most effective levers for brands and retailers to stop competing solely on price and start competing with intelligence.

Implementing a well-designed segmentation strategy, supported by the right technology, allows you to capture more value from the market, improve loyalty in key segments, and ultimately, dramatically optimize both sales and profit margins.

Ready to implement a smarter pricing strategy? Discover how our Dynamic Pricing software helps you segment and optimize your prices in real-time. Request a demo.