Price Discrimination: Why Different People Pay Different Prices

Student discounts, peak fares, and coupons are all forms of price discrimination. Here is why firms use it.

By Felix Narayan | Sep 27, 2026 | 4 min

Price discrimination occurs when a seller charges different prices to different customers for the same or similar product, for reasons not related to cost.

It allows firms to capture more value from customers who are willing to pay more while still selling to those who are more price-sensitive.

I Types

— First degree: charging each customer their maximum willingness to pay, rare in practice
— Second degree: prices vary with quantity or version, such as bulk discounts
— Third degree: different prices for different groups, such as students or seniors

II Examples

— Airline fares that vary by booking time
— Discounts for students and older people
— Coupons and loyalty schemes

III Conditions

Firms need some market power, a way to separate customers, and a way to prevent resale.

IV Effects

Price discrimination can increase output and allow some customers to buy who otherwise could not. It can also transfer value from consumers to producers.

This is general educational information about economics, not financial, investment, or tax advice. Consult a qualified, licensed professional before making financial decisions.

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