A product pricing strategy by which a firm charges the highest initial price that customers will pay. As the demand of the first customers is satisfied, the firm lowers the price to attract another, more price-sensitive segment.
The skimming strategy gets its name from skimming successive layers of "cream," or customer segments, as prices are lowered over time. It allows the firm to recover its sunk costs quickly before competition steps in and lowers the market price.
The skimming strategy gets its name from skimming successive layers of "cream," or customer segments, as prices are lowered over time. It allows the firm to recover its sunk costs quickly before competition steps in and lowers the market price.
Price skimming is sometimes referred to as riding down the demand curve. The objective of a price skimming strategy is to capture the consumer surplus.
It is effective only when the firm is facing an inelastic demand curve. Skimming encourages the entry of competitors. When other firms see the high margins available in the industry, they will quickly enter.
Price skimming occurs in mostly technological markets as firms set a high price during the first stage of the product life cycle. The top segments of the market which are willing to pay the highest price are skimmed of first. When the product enters maturity the price is lowered.
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