<P> Price discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are transacted at different prices by the same provider in different markets . Price discrimination is distinguished from product differentiation by the more substantial difference in production cost for the differently priced products involved in the latter strategy . Price differentiation essentially relies on the variation in the customers' willingness to pay and in the elasticity of their demand . </P> <P> The term differential pricing is also used to describe the practice of charging different prices to different buyers for the same quality and quantity of a product, but it can also refer to a combination of price differentiation and product differentiation . Other terms used to refer to price discrimination include equity pricing, preferential pricing, dual pricing and tiered pricing . Within the broader domain of price differentiation, a commonly accepted classification dating to the 1920s is: </P> <Ul> <Li> Personalized pricing (or first - degree price differentiation)--selling to each customer at a different price; this is also called one - to - one marketing . The optimal incarnation of this is called perfect price discrimination and maximizes the price that each customer is willing to pay . </Li> <Li> Product versioning or simply versioning (or second - degree price differentiation)--offering a product line by creating slightly different products for the purpose of price differentiation, i.e. a vertical product line . Another name given to versioning is menu pricing . </Li> <Li> Group pricing (or third - degree price differentiation)--dividing the market into segments and charging a different price to each segment (but the same price to each member of that segment). This is essentially a heuristic approximation that simplifies the problem in face of the difficulties with personalized pricing . Typical examples include student discounts and seniors' discounts . </Li> </Ul> <Li> Personalized pricing (or first - degree price differentiation)--selling to each customer at a different price; this is also called one - to - one marketing . The optimal incarnation of this is called perfect price discrimination and maximizes the price that each customer is willing to pay . </Li>

Difference between 1st 2nd and 3rd degree price discrimination
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