Question

Explain why the airlines can price discriminate and H&M can’t.

Answer 1

For price discrimination to be successful, two conditions must be fulfilled:

(1) The seller can effectively segregate the market into different market segments on basis of price elasticity of demand for customers, and such elasticity must be known with certainty. Even if exact value of elasticities are not known, the seller can classify the market into elastic and inelastic segments.

(2) Re-sale from one segment from another is not possible.

Airlines can effectively segment its flyers into economy and business classes. Business class travelers have relatively inelastic demand compared to economy travelers, and re-sale of tickets from one segment to another is not possible. So airlines can effectively price discriminate.

In contrast, H&M is an online fashion retailer and has many rival firms. H&M cannot segment the online customers on basis of their elasticity of demand, and cannot prevent customers from buying at lower price from H&M and re-selling it to others. Therefore H&M cannot price discriminate.