Under which two conditions can organizations be most effective when using a skimming pricing strategy?

• A. When government imposes a price ceiling below equilibrium price
• B. When the product is a necessity and subject to a price floor
• C. When demand is elastic and there are many substitutes
• D. When demand is inelastic and there are few competitors

Answer: (D)

Verified step by step guidance

1. Understand what a skimming pricing strategy is: it involves setting a high initial price for a new or innovative product to 'skim' segments of the market willing to pay more before gradually lowering the price.
2. Identify the role of demand elasticity in pricing strategies: when demand is inelastic, consumers are less sensitive to price changes, allowing firms to charge higher prices without losing many customers.
3. Consider the competitive environment: having few competitors means less pressure to lower prices, enabling the firm to maintain higher prices for longer periods.
4. Analyze why a price ceiling below equilibrium or a price floor on necessities would not support skimming: price controls limit the ability to set high prices, and necessities often have different pricing dynamics.
5. Conclude that the two conditions for effective skimming pricing are when demand is inelastic and when there are few competitors, as these allow the firm to maximize profits by charging high prices initially.