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In a world where internet access defines opportunity, users in emerging markets are paying more for less — and they’re doing it by choice.

In Africa, for instance, the internet has become a lifeline, providing users with everything from entertainment to employment. The number of internet users across the continent reached 570 million in 2022, more than double the number in 2015. Many of these users choose daily or hourly data bundles instead of monthly plans, even though these options are more expensive per MB. African customers often prefer these limited data plans because they allow users to consume — and pay for — the specific amount of data they want, based on their financial ability.

This pricing model is common not only in tech industries, but among many successful businesses across sectors, which offer a lower price point to customers in exchange for a lower level of quality or convenience, or a lower price per unit in exchange for purchasing a larger amount of the product. Since these firms cannot tell who is willing to pay more and who is willing to pay less, they offer multiple pricing options for different levels of product quality/quantity, and allow customers to self-select. This practice is known as second-degree price discrimination, and despite its ominous name, it can benefit both companies and their customers.

Below, I’ll discuss how second-degree price discrimination is being applied by businesses across sectors, why this approach has unique appeal in emerging markets, and how it can be leveraged by governments and other organizations to bring products and services to low-income populations.

Understanding Second-Degree Price Discrimination and its Uses

Unlike first-degree price discrimination (where companies try to accurately determine the maximum amount customers will be willing to pay, then sell their products or services at that price), or third-degree price discrimination (where different customer segments are charged different set prices), second-degree price discrimination gives consumers some influence over the amount they’re paying for the product.

This model is common in the restaurant business, where restaurants offer different pricing menus that allow consumers to select the product options that are most aligned with their needs and willingness to pay. There are two customer categories in this arrangement: high- and low-income. The main aim of second-degree price discrimination is to ensure that customers reveal their category through their choice. Customers in each category act similarly, placing a higher value either on quality/quantity or affordability — and as with the other degrees of price discrimination, customers in each category are assumed not to resell the product. Through this approach, the restaurant industry can comfortably target both populations without worrying about losing money, as the groups accurately self-select based on their own needs, preferences and financial capabilities.

When this model is applied to data and internet connectivity, even though the cost per unit is high, low-income individuals are still able to choose the plan they want based on their capacity to pay. As a result, this approach works well in developing countries, where it is primarily used by businesses to give low-income households access to goods in small and affordable doses. Since individuals are free to decide how much of the product they can afford, this model allows companies to serve multiple income segments without being accused of exploiting lower-income customers.

The Design Strategy Behind Second-Degree Price Discrimination

However, even though second-degree price discrimination has more advantages than disadvantages, not all price discrimination is uncontroversial. For instance, in the U.S., convenience stores filed a lawsuit earlier this year against PepsiCo and Frito-Lay, accusing them of engaging in unfair price discrimination by offering their products at lower prices to large retailers like Walmart, while charging higher prices to smaller stores for the same product. This kind of alleged price discrimination can be seen as unfair, because unlike customers in second-degree price discrimination, convenience stores don’t have the option of paying a lower per-unit price, giving larger retailers a competitive advantage over these smaller stores. This can harm not only the stores but also their customers, reducing consumer choices and increasing their costs, while raising concerns about the market dominance of larger retailers or wholesalers.

To ensure that individual customers don’t feel similarly mistreated and that second-degree price discrimination works as intended, firms must design the options cleverly so that high-income individuals who can afford to pay more have no incentive to choose the lower-cost option. This is why, for example, airline companies create a sharp difference between economy and business class, offering more value not just through better seating but also through boarding privileges, meals, and better luggage and rescheduling options. Their goal is to convey the message that the economy class might be cheaper, but it comes with limitations that make it unattractive to high-income consumers.

This logic is not limited to airlines: The same pricing strategy can be seen in streaming subscriptions (e.g., basic vs. premium Netflix), education (e.g., online course certificates vs. free audits), and other companies and business sectors. The beauty of second-degree price discrimination is that it not only enables more customers to afford a product or service, it also feels like a win-win for both parties: Consumers feel they are paying what they can afford for a product they value, while recognizing and accepting that those who pay more will receive more, so they don’t feel cheated. And companies are able to sell their goods to a broader market, profitably serving different income segments. It is a form of economic discrimination that paradoxically promotes both access and allocative efficiency.

How Governments, NGOs and Businesses Can Leverage Price Discrimination

The benefits of second-degree price discrimination can extend beyond the private sector. The practice has the potential to benefit not only businesses, but also governments and non-governmental organizations and the communities they serve, when implemented effectively.

For example, pay-as-you-go (PAYGo) business models commonly use second-degree price discrimination to allow users to pay off the cost of a solar home system or appliance in small increments based on how much energy they consume — an approach that’s especially suited to early-stage solar customers seeking electricity for lighting or other less energy-intensive purposes. Sectors like digital services and water often employ a similar usage-based pricing structure, providing customers with greater flexibility by accommodating their differing levels of demand and ability to pay.

Governments and development programs are engaging with businesses to help extend this model to communities that have been excluded from vital services. For instance, in Africa, public-private partnerships such as the Kenya Off-Grid Solar Access Project have improved access to PAYGo solar in rural communities by offering results-based financing to incentivize private providers to offer these customers access to renewable energy for a nominal daily fee. The goal of this type of partnership is to allow low-income households to decide how much of a service they are capable of buying without experiencing any financial hardship, while helping to defray the higher expenses a business incurs in serving these remote communities.

However, governments and public programs need to be careful not to create unwelcome incentives if they enable price discrimination between different segments of the population. For example, India’s PAHAL program was created to address the negative repercussions of a previous government program, which provided liquefied petroleum gas (LPG) cylinders at lower, subsidized prices to qualifying households, while commercial users paid market prices. This approach inadvertently incentivized the creation of a black market, in which households (or fraudulent beneficiaries) acquired LPG at a reduced cost and resold it to the commercial sector, introducing significant inefficiencies to the program. In response, the PAHAL program replaced these subsidized LPG handouts with direct benefit transfers, giving the subsidy amounts directly to consumers in the form of cash transfers to their bank accounts, which they could use to buy the LPG they needed, at a price determined by the market. This approach has ensured that only verified users receive this government assistance, while allowing beneficiaries to choose the amount of gas they can afford — and eliminating a key potential downside of price discrimination: the reselling of reduced-price products for a profit.

At first glance, price discrimination may sound negative or even exploitative to most people. But second-degree price discrimination, if designed ethically and implemented transparently, can be a powerful tool for inclusion, equity and efficiency. It invites governments, businesses and global institutions to redefine fairness: not as giving everyone the same products or services, but as giving everyone a chance to access these products and services in a way that meets their needs — without burdening their budgets.

Wasiu Akintunde is a doctoral student in Economics at Texas Tech University, whose research focuses on applied microeconomics, industrial organization and health economics.

Photo credit: Angèle Kamp