Price skimming is designed to yield maximum unit sales volume?

Question

is this true or false and why

Answer 1

Not exactly...in fact, it may not yield maximum unit volume but should yield maximum total profit. Here's why...

Skimming takes advantage of something called "consumer surplus". Consumer surplus is the difference between what a person was willing to pay and what he/she actually paid. For many purchases, people have what's called a "reservation price"...the most you're willing to pay for a product (or, more accurately, the most you're willing to pay for the benfits the product offers). For example, if you're looking for a new apartment, you probably have a clear idea of the most you are willing to pay ($600/month for example). If you can find an apartment that meets all your needs for $500/month, there was $100 worth of consumer surplus in your transaction. Skimming minimizes the amount of surplus.

With a skimming strategy, a company starts with a high price. Everyone who is willling to pay that price for the product does so...and this number is quite likely to be MUCH less than the total potential market for the product. Those that aren't willing to pay the higher price wait until the price goes down. The company then lowers the price to attract some of the holdouts and earns the maximum profit from them...and the cycle continues until the price reaches its lowest possible point and attracts the maximum possible audience. Thus, it MAY yield maximum volume at the end of the cycle but not over the entire life...at the beginning, it yields maximum profit at the expense of unit sales volume.

Perhaps the best way to answer this question is with an example...flat-panel plasma/LCD televisions. When they first hit the market they sold for over $10,000...very few people were able to afford a $10K TV set and most people that needed/wanted to buy a new TV at that time had to settle for a cheaper option. As the prices dropped, more people that were in the market for a TV were able to buy a flat-panel/plasma and unit volume increased. However, at least some of the people that had already purchased another (cheaper) TV were no longer in the market for a TV...thus, total unit sales were NOT maximized by the skimming strategy.

Answer 2

Price skimming is actually used in two situations...

the first is used on high class luxury goods ....

The second is used when introducing a new product to the market, and mainly to cover the cost to be incurred in the introduction stage of the PLC....

I advice that you check on the BCG Matrix and the PLC....