This paper presents a classroom experiment designed to illustrate key concepts of third-degree price discrimination. By participating as buyers and sellers, students actively learn (1) how uniform pricing differs from group pricing, (2) how resale between buyers limits a seller’s ability to price discriminate, and (3) how preventing price discrimination might reduce welfare. The exercise challenges sellers to set optimal prices against unknown demand curves, using a concrete story of pharmaceutical pricing to American and Mexican consumers. By working through profit calculations for themselves, students eventually arrive at the optimal seller prices in three different settings: uniform pricing, pricing separately to two groups, and pricing to two groups who can resell to each other. The experimental design encourages students to converge reliably to the theoretical predictions, and students find the exercise to be both interesting and illuminating. Classroom discussion can focus on real-world examples of price discrimination, as well as regulatory policy questions in industrial organization and international trade.
Last revised: September 2005
Download the main Excel workbook for conducting the experiment in class.
Download the optional Excel workbook for exploring different combinations of consumer values.
Return to David Reiley's Curriculum Vitae