Three necessary conditions must be met before a seller can practice third-degree price discrimination. the conditions are: buyers must be separated into groups or submarkets according to their elasticities of demand, the seller must possess some degree of monopoly power,

a. the seller must prevent transfer of sales between the groups or submarkets.
b. the seller must have "market dominance".
c. the buyer must have profit maximization as a goal.
d. the buyer must have variable costs that have to be recovered.

A. The Seller Must Prevent Transfer of Sales Between the Groups or Submarkets

Explanation:

There are three degrees of price discrimination as follows:

First Degree - This is the perfect degree, where sellers charge consumers the reservation price for goods.

Second Degree - Sellers divide their consumers into groups called blocks and decide to charge certain blocks at the reservation price for goods.

Third Degree - At this point, sellers divide their consumers into sub-markets, each sub-market has its unique demand curve and sellers try to maximise profit in each sub-market.

Looking at the third degree therefore, if sellers are not able to prevent transfer of sales between submarkets then this price discrimination cannot work. Because Submarket A will be able to interact with Submarket B and this will influence the demand curve and even sales.

For instance, if the seller sells at $2 to Submarket A and at $4 to Submarket B; consumers of Submarket B can easily contact Submarket A and buy for $2.5 and cut off the seller completely. Therefore, the seller must prevent the transfer of sales between the submarkets for this degree of discrimination to work.

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