A skimming pricing strategy is most likely to succeed under which of the following conditions?

• A. The product is new and has few close substitutes.
• B. There are strict government-imposed price ceilings.
• 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 strategy entails: it involves setting a high initial price for a new product to 'skim' segments of the market willing to pay more before gradually lowering the price to attract more price-sensitive customers.
2. Identify the conditions that favor skimming pricing: typically, the product should be new and unique, with few close substitutes, so that consumers perceive high value and are less sensitive to the high initial price.
3. Analyze why strict government-imposed price ceilings would hinder skimming: price ceilings limit how high a price can be set, preventing the firm from charging the high initial price needed for skimming.
4. Consider the impact of a highly competitive market with many similar products: this increases price competition and reduces the ability to maintain a high price, making skimming less effective.
5. Evaluate consumer price sensitivity: if consumers are highly sensitive to price changes, they are less likely to accept a high initial price, which undermines the skimming strategy.