Market Skimming

The practise of market skimming involves chaching a relatively high price for a short time where new, innovative or much improved product is launched onto a market. The objective is to skim-off customers who are willing to pay more to have the product sooner.
The success of price skimming is largely dependent on the inelasticity of demand for the product. High prices can be enjoyed in the short term where demand is relatively inelastic. In short term, supplier benefits from 'monopoly profits' but as profitability increases, competing suppliers are attracted to the market and hence price falls.
Advantages of price skimming:
1. When a highly innovative product is launched, the high research and development and the cost of distribution and promotion are covered by price skimming.
2. Skimming can be effective strategy in segmenting the market. A firm can divide the market into a number of segments and reduce prices at different stages, thus acquiring profit from each segment.
3. For prestige goods, the practise of price skimming can be particularly successful, since the buyer tends to be more prestige conscious than price conscious.