Final answer:
Choosing a pricing strategy involves considering product price elasticity, competitor pricing, and price constraints. For elastic products, penetration pricing may be beneficial, while skimming may suit inelastic products with less price sensitivity. Price elasticity understanding is key, as illustrated by monopolistic competitors like 'Authentic Chinese Pizza' setting prices based on demand curves.
Step-by-step explanation:
When launching a product and deciding on a pricing strategy, several factors need to be considered including whether the product is price elastic or inelastic, competitor prices, and price floors and ceilings. For an elastic product, where sales are sensitive to price changes, strategies such as penetration pricing might be effective to quickly gain market share. In contrast, skimming pricing might be suitable for inelastic products, typically new or innovative, where initial higher prices can be charged before competitors enter the market.
Prices in a competitive market are often determined by the intersection of supply and demand. Economic models and demand curves are used to predict and explain changes in pricing. For example, if a monopolistic competitor like 'Authentic Chinese Pizza' determines its profit-maximizing quantity of output, they would use their perceived demand curve to set a price, such as $16 per pizza for a quantity of 40. Finally, understanding price elasticity is crucial as it impacts revenue and helps businesses determine the optimum pricing point to maximize profits.