A skimming pricing policy is likely to be most effective when:

• A. the product is innovative and faces little immediate competition
• B. the product is a basic commodity with elastic demand
• C. the market is highly competitive with many similar products
• D. consumers are highly sensitive to price changes

Answer: (A)

Verified step by step guidance

1. Understand what a skimming pricing policy is: it involves setting a high initial price for a new or innovative product to maximize profits from consumers willing to pay more before gradually lowering the price over time.
2. Identify the conditions under which skimming pricing works best: it is most effective when the product is innovative, unique, and faces little immediate competition, allowing the firm to charge a premium price without losing many customers.
3. Analyze why skimming pricing is less effective for basic commodities or products with elastic demand: in these cases, consumers are sensitive to price changes and will switch to alternatives if prices are high, making high initial prices less sustainable.
4. Consider the impact of market competition: in highly competitive markets with many similar products, skimming pricing is difficult because competitors can offer lower prices, reducing the ability to maintain a high price.
5. Conclude that the best scenario for skimming pricing is when the product is innovative and faces little immediate competition, as this allows the firm to capitalize on early adopters willing to pay a premium.