Act III is set solely in Hardcastle's home.
Hardcastle enters alone, confused over what his friend Charles Marlow meant by describing the young Marlow as modest, considering the young man's behavior thus far. Hardcastle is particularly worried that the behavior will put off his daughter.
Kate enters, in a plain dress per her father's wishes, and both express their shock at how different Marlow is from his or her expectations. Of course, Kate is confused over his modesty (expecting impudence), and Hardcastle over his impudence (expecting modesty). They realize the contradiction but Hardcastle does see they both know enough to "reject him," a decision Kate approves unless she can reveal him to be more pleasing to each of them than they yet realize. Hardcastle finds such an outcome unlikely, but grants her license to attempt to correct his first impression, assuming her desire to do so is only because she thinks he is good-looking, and so wants to find something to like in his character.
They leave, and Tony rushes on, holding the casket containing Constance's jewels. Hastings joins him, and Tony reveals he has stolen the jewels, which concerns Hastings since he knows Constance is slowly finding success at convincing the old woman to turn over the jewels willfully. Tony calms him, assuring Hastings that he himself will take care of any resentment that might arise in Mrs. Hardcastle.
They hear the women approaching, so Hastings exits quickly with the casket. Mrs. Hardcastle attempts to convince Constance that a young woman does not need jewels, which should be reserved to disguise her faded beauty when she gets older. Constance does not accept the argument, so Mrs. Hardcastle attempts to have Tony praise her beauty to dissuade her from pursuing the jewels.
Tony pulls his mother aside, and suggests she lie to Constance, claiming the jewels have been stolen so as to put an end to the matter. Mrs. Hardcastle, who admits to him that she merely wants to save the jewels for him (and hence does she try to set them up in marriage), gladly accepts the plan. Mrs. Hardcastle makes a mock confession of the missing jewels, which Constance refuses to believe until Tony stands as witness to the lie, claiming he too has seen them missing. Constance is upset, and Mrs. Hardcastle's offer to lend the girl her garnets does nothing to comfort her, but Mrs. Hardcastle nevertheless leaves to fetch them.
While she is gone, Tony confesses his plan to Constance, who is happy. However, Mrs. Hardcastle returns quickly, having discovered the jewels have actually been stolen. She laments their loss dramatically, and Tony plays along, as though this is still their play-acting for Constance's benefits. Her attempts to convince him the jewels are actually stolen (which he of course knows to be the case) only lead him to play-act harder, which makes her angrier until she charges offstage.
All exit, and Kate enters with a maid, laughing about the joke Tony played on the men. The maid tells Kate that, as they passed Marlow moments before, he asked the maid about Kate, believing her to be a barmaid because of her simple dress, and because he was so shy with her before that he had never seen her face. Kate sees in this mistake an opportunity to deceive him, and decides to continue playing the barmaid so that she can glimpse his true character and so that she "shall be seen." The maid wonders whether Kate can pull off such a ruse, but Kate promises she has the required acting skills.
Marlow enters, remarking to himself how terrible is his situation and how he will leave soon. Kate, acting the barmaid, approaches him and asks if she can help, offers he refuses until he notices her beauty. He grows immediately flirty and open, remarking on the "nectar" of her lips. They speak with great wit, and he confesses to his ability with ladies in town, speaking in lively tones of his life there. Kate asks whether he was so free when he spoke with Miss Hardcastle (which is of course herself, but he doesn't realize that), and he insists he is not in awe of her. Kate also says, in character, that she has lived in the house for 18 years. Overcome with passion, he pulls her close right as Mr. Hardcastle enters. Marlow quickly exits, and Hardcastle confronts Kate, accusing her of lying about Marlow's modesty before since he just saw such an aggressive move. Kate asks for more time to reveal his true character—his "virtues that will improve with age." Hardcastle denies her until she promises to prove her point by the end of the evening, a limit to which he agrees.
Act III is primarily concerned with complicating the plot, though the confrontation between Kate and Marlow that ends the Act is central to its primary themes.
One of Goldsmith's great accomplishments in She Stoops to Conquer is the naturalness with which he presents such a contrived and complicated plot. This success lies in his superb command of character that, as already noted, uses comic stock characters but complicates them so that their motivations make the contrivances of the plot believable. For instance, we accept Tony is a trickster who loves practical jokes, most of all when they are played on his mother. As a result, the levels of deceit he plays on her – stealing the jewels, having her lie about the theft before she knows about it, and then continuing to pretend they are stolen even when he knows she has discovered the theft – will help to push her into the action she takes in Act IV, and yet all this complication is totally acceptable because we believe Tony is this kind of person.
Most of the complications in the act concern this subplot and are great fun because of the dramatic irony – Goldsmith presents the plot so naturally that an audience completely understands what is happening so that they can appreciate the confusion of the characters who lack such omniscience.
Meanwhile, the other section of the act is far more substantial, as it explores the questions of appearance and human foibles. Hardcastle and Kate are both disappointed with what they find in Marlow, though ironically each would be satisfied to have seen the side of Marlow revealed to the other. Goldsmith suggests here our desire to see a virtuous side of someone, when in fact all humans are complicated and prone to hypocrisy.
This theme is most clear in Kate's plan to reveal Marlow's true side. By “stooping” both in terms of class and wealth, she is able to pull out his true nature: a sexually aggressive, rather impetuous young fellow. And yet, for a woman in this time period, such behavior would be frowned upon in all legitimate suitors, and so it excites her to see this type of liveliness in someone who her father might ultimately approve as a husband. Marlow's true nature cannot be contained in either extreme – his extreme respect for modesty or extreme love for women – but instead he has been forced to such extremes by the extreme manners of an aristocratic expectation of behavior. The question of appearance is very much on display, as Kate can, by fashioning a different appearance, change the way reality presents itself to her.
In a way, Kate's plan is also a sly comment on the theatre itself. By acting in a “low” manner, Kate is able to engender truth, a truth that reveals the silliness of human nature. This is very much Goldsmith's purpose in writing a “laughing comedy” that celebrates lowness as a mirror to truth, and it is no accident that Kate draws attention to the artistry involved in acting in this way. She wants to be truly "seen," to be appreciated not for her position as a suitable wife but as an interesting person, and she needs the ruse of theatre to accomplish that.
Finally, we get here the best support for a Freudian understanding of Tony and his mother's relationship, when she almost flirtatiously admits she plans his love life so as to secure his wealth, while he is all the while playing around with her.