What pricing strategy is typically employed when the demand for a product is expected to be price inelastic?

The skimming pricing strategy is often utilized in situations where the demand for a product is expected to be price inelastic. This means that consumers are less sensitive to price changes and are willing to pay higher prices for a new or innovative product.

In the case of price inelastic demand, a company can initially set a high price for a new product, capitalizing on the willingness of early adopters or enthusiasts to pay a premium. This approach allows the business to maximize revenue from consumers who value the product highly right from its launch. As time progresses and competition increases or as the market matures, the company can gradually lower the price to attract a broader segment of customers.

This strategy is particularly effective for technology products, pharmaceuticals, and luxury items where differentiation is significant, and early customers perceive a higher value. By using skimming pricing, companies not only recover their research and development costs more quickly but also engage in strategic positioning in the market.