Final answer:
Price skimming involves setting a high price initially and then gradually lowering it. This strategy aims to maximize profits from early adopters and recover initial costs quickly. Over time, prices are reduced to attract a wider market segment.
Step-by-step explanation:
Price skimming refers to setting the price high initially and then gradually lowering it. This strategy is commonly used by companies when introducing a new product into the market, particularly when the product is innovative or has unique features. By setting a high price, the company is able to maximize its profits from early adopters who are willing to pay a premium for the latest technology or product. Over time, as competition increases or the novelty of the product decreases, the company will lower the price to appeal to a broader segment of the market.
Price skimming allows the company to recover its initial costs quickly and captures the consumer surplus from different market segments. However, it requires a strategic approach to avoid alienating customers who may wait for lowered prices or feel taken advantage of if the price drops too soon after their purchase.