Second-Degree Price Discrimination under Monopoly
- Dr. Dona Ghosh
- Sep 18, 2025
- 4 min read
Second-degree price discrimination is a pricing strategy that enables businesses to charge different prices for the same product or service. This pricing is based on the quantity consumed or the version of the product chosen. Many industries, such as retail, utilities, and entertainment, utilize this strategy to maximize revenue by appealing to diverse consumer preferences and willingness to pay.
            In this article, we will examine second-degree price discrimination, provide clear examples, graphical illustrations and discuss its implications for both businesses and consumers.
Definition of Second-Degree Price Discrimination
Second-degree price discrimination occurs when companies charge different prices based on the quantity purchased or the type of product selected. This strategy allows businesses to capture consumer surplus by offering multiple pricing tiers that target different market segments.
            For example, a company might implement bulk pricing, where the unit price decreases as quantity increases. In a real-world context, a beverage company may set the price of a single can at $1.50, but offer a 12-pack for $12.00, lowering the price per can to $1.00. This setup encourages consumers to buy more while allowing the company to optimize revenue from those who are willing to pay a higher price for added volume.
Examples of Second-Degree Price Discrimination
1. Bulk Pricing
Bulk pricing is one of the most recognizable forms of second-degree price discrimination. Grocery stores often provide enticing discounts for customers who purchase larger quantities. For example, if a consumer buys pasta, a single box may cost $2, but buying a six-pack is priced at $10, effectively reducing the cost to about $1.67 per box. This pricing strategy not only encourages greater purchases but also benefits retailers by increasing overall sales volume.
2. Subscription Services
Another common example of second-degree price discrimination is found in subscription-based services, such as video streaming platforms. These services often provide tiered pricing depending on the features and quality offered. For instance, a popular streaming service may charge $8 per month for a basic plan, $12 for a standard plan, and $16 for a premium plan. Each tier may vary in the number of devices that can stream simultaneously or the availability of high-definition content. This allows consumers to select plans that align with their viewing habits and financial situation.
3. Utility Pricing
Utility companies frequently use tiered pricing structures as a form of second-degree price discrimination. For example, a residential water utility might charge $0.50 per gallon for the first 1,000 gallons, $1.00 for the next 1,000 gallons, and $1.50 for any usage beyond that. This model encourages customers to conserve water while also allowing the utility to earn more from higher consumption.
Graphical Illustration
Second-degree price discrimination (also called block pricing) occurs when the monopolist charges different prices for different quantities or blocks of the good, but every consumer faces the same price schedule.
            Suppose a monopolist faces the demand curve P = 24 − 2Q and constant marginal cost MC = 6. Instead of charging a single price, the monopolist offers a block pricing scheme:
First 3 units at ₹18 each
Next 3 units at ₹12 each
Next 3 units at ₹6 each
            This pricing encourages consumers with higher willingness to pay to purchase more units at a higher price, while also capturing additional demand from consumers willing to buy only at lower prices.
            In the figure, the blue curve is the demand curve, and the red dashed line represents constant marginal cost. The monopolist sets different block prices (green horizontal lines) for successive ranges of quantity. The yellow shaded regions represent the monopolist’s profit for each block (difference between price and MC). It is noticeable that under second-degree price discrimination, the monopolist can extract more consumer surplus than under uniform pricing, but not as much as under first-degree price discrimination (where all consumer surplus is captured).
Deep Dive into Second-Degree Price Discrimination
Second-degree price discrimination benefits both businesses and consumers. For companies, it maximizes revenue by capturing consumer surplus through pricing tiers. Organizations can attract a wider range of customers—from budget-conscious buyers to those willing to pay for premium features.
            For consumers, this pricing approach provides flexible options tailored to their needs and financial constraints. Customers can select products or services that suit their budgets. It may also foster loyalty, as larger purchases or higher-tier subscriptions often offer perceived added value.
            However, there are downsides to consider. Some consumers may become frustrated if they believe they aren't getting the best deal, especially if they can't access certain pricing tiers. Businesses must manage their pricing strategies carefully to avoid alienating potential customers or creating feelings of unfairness.
Final Thoughts
Second-degree price discrimination is an effective pricing strategy that helps businesses optimize revenue while providing consumers with choices that match their preferences and budgets. By grasping this concept, both parties can better navigate the marketplace.
            As demonstrated through various examples, from bulk pricing in grocery stores to tiered subscriptions, second-degree price discrimination plays a significant role in many industries. Understanding consumer behavior and willingness to pay is essential for shaping successful pricing strategies.
            Businesses leveraging this approach can enhance profitability while delivering value to customers, fostering positive outcomes in the marketplace.
