Price Skimming

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Price Skimming

The practice of a company offering a new product and charging a high price at first, but gradually reducing it before competitors begin to sell similar products. For example, a company may offer a new product at $40 per unit, then in six months reduce the price to $35, to $30 in another six months, and so forth. Price skimming allows the company to recover its sunk costs (such as research and development) while still remaining competitive when other companies begin to offer substantially the same product. It is also called a high price strategy.
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Given the first-period price of the online channel, the traditional channel has three pricing strategy options: (i) low price strategy: [p.sub.R1] < [p.sub.D1]/[[theta].sub.1] and [bar.v] = [p.sub.R1]; (ii) medium price strategy: [p.sub.D1]/[[theta].sub.1] [less than or equal to] [p.sub.R1] < 1 - [[theta].sub.1] + [p.sub.D1] and [bar.v] = [p.sub.D1]/[[theta].sub.1]; (iii) high price strategy: 1 - [[theta].sub.1] + [p.sub.D1] [less than or equal to] [p.sub.R1] [less than or equal to] 1 and [bar.v] = [p.sub.D1]/[[theta].sub.1].
The first-period profit of the traditional seller is positive under medium price strategy where [p.sub.D1]/[[theta].sub.1] [less than or equal to] [p.sub.R1] [less than or equal to] 1 - [[theta].sub.1] + [p.sub.D1] and it is zero under high price strategy where 1 - [[theta].sub.1] + [p.sub.D1] [less than or equal to] [p.sub.R1] [less than or equal to] 1; thus, the medium price strategy in which [p.sub.D1]/[[theta].sub.1] [less than or equal to] [p.sub.R1] [less than or equal to] 1 -[[theta].sub.1] + [p.sub.D1] is better than the high price strategy in which 1 - [[theta].sub.1] + [p.sub.D1] [less than or equal to] [p.sub.R1] [less than or equal to] 1
Furthermore, the medium price strategy is always better than the high price strategy for the online channel in the first period.
Similar to the traditional channel, the online channel also has three pricing strategy options when his/her rival's first-period price is given as follows: (i) high price strategy: [p.sub.D1] > [p.sub.R1][[theta].sub.1] and [bar.v] = [p.sub.R1]; (ii) medium price strategy: [p.sub.R1] + [[theta].sub.1] -1 [less than or equal to] [p.sub.D1] [p.sub.R1] [[theta].sub.1] and [bar.v] = [p.sub.D1]/[[theta].sub.1]; (iii) low price strategy: [p.sub.D1] [less than or equal to] + [[theta].sub.1] - 1 and [bar.v] = [p.sub.D1]/[[theta].sub.1].
Thus, for the online seller, it is never optimal for him/her to use a high price strategy that [p.sub.D1] > [p.sub.R1][[theta].sub.1].
During the process of spectrum sharing, each of the MVNOs has two possible price strategies: either select high price strategy [p.sub.ih] or low price strategy [p.sub.il], (i = 1,2).
For an operator, a pure strategy is either to select high price strategy or to take low price strategy.
The growth rate dx/dt can be presented as the difference between the payoff of selecting high price strategy and the average expectation utility of the two different strategies.
The equilibrium (0, 0) and (1, 1) imply that the strategies profiles of operators converge to low price strategy ([p.sub.1[l.sub.p2l]) and high price strategy ([p.sub.1h], [p.sub.2h]), respectively.
That is to say, if one of the two operators chooses high price strategy, it is optimal for the other to choose high price strategy too.
Perhaps a starting point should be an investigation into why our largely foreign-owned energy companies can have a high price strategy here whilst holding costs down in Europe.
That fact that one firm failed with price signaling and one succeeded is exactly evidence of the difficulty of imitating the successful high price strategy.