Definition 

Price skimming is a price strategy where firms charge high prices in the initial stage and lower their prices over time. 

Explanation

Price skimming can be used when a new product is introduced. As long as the competition has not entered the market, the firm can benefit from its monopoly position and generate high revenues by setting a high price. Once customer demand is satisfied and competition enters the market, the firm has to lower its price.

What to watch out for 

❌ Competitors will recognize that the one firm is benefiting from high profit margins in the market and therefore have an incentive to enter the market to benefit as well.

❌ Price skimming can only be used as a strategy in a market with little to no competition.

❌ If the firm sets prices too high, consumers may not be willing to buy the product. As a consequence, the firm cannot benefit from economies of scale because sales are too low.

Sources & further reading

 

Price skimming - Investopedia

Price Skimming Definition (investopedia.com)

Price Skimming - Corporate finance institute

Price Skimming - Overview, Rationale and Practical Example (corporatefinanceinstitute.com)

 

 

Free Whitepaper

Check out our Whitepaper

"The Evolution of Pricing"