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What Is Price Skimming?: First Mover
What Is Price Skimming?: First Mover
Disadvantages
Once those goals are met, the original product creator can lower prices to
attract more cost-conscious buyers while remaining competitive toward any
lower-cost copycat items entering the market. This stage generally occurs
when sales volume begins to decrease at the highest price the seller is able to
charge, forcing them to lower the price to meet market demand.
Skimming can encourage the entry of competitors since other firms will notice
the artificially high margins available in the product, they will quickly enter.
When a new product enters the market, such as a new form of home
technology, the price can affect buyer perception. Often, items priced towards
the higher end suggest quality and exclusivity. This may help attract early
adopters who are willing to spend more for a product and can also provide
useful word-of-mouth marketing campaigns.
Price skimming may also not be as effective for any competitor follow-up
products. Since the initial market of early adopters has been tapped, other
buyers may not purchase a competing product at a higher price without
significant product improvements over the original.
The consumer who purchases the commodity during the high demand
period has to pay more as compared to the one who buys during low
demand periods.
The demand for many goods is larger during certain times of the day or week. For
example, roads are congested during rush hours during the morning and evening
commutes. Electricity has larger demand during the day than at night. Ski resorts
have large (peak) demands during the weekends, and smaller demand during the
week.
Peak Load Pricing = Charging a high price during demand peaks, and a lower
price during off-peak time periods.
Economic efficiency is greatly improved by charging higher prices during peak times.
If the utility were required to charge a single price at all times, it would lose the
ability to charge consumers an appropriate price during peak demand periods.
Charging a higher price during peak hours provides an incentive for consumers to
switch consumption to off-peak hours. This saves society resources, since costs are
lower during those times.
The next section will discuss a two-part tariff, or charging consumers a fixed fee for
the right to purchase a good, and a per-unit fee for each unit purchased.