Chapter 19, Problem 1E

To determine

To explain:

The reason for high price when product is introduced first in a market.

Explanation of Solution

The reason for high price when product is introduced first in a market is shown graphically as below:

The price for big-screen televisions was high initially because whenever a new product launched in the market, the producer enjoys the benefit of least competition. A firm or producer charges a high price in order to skim the highest revenue and it lowers the price stepwise in order to generate maximum profit. The above diagram shows that the firm charges P1 price for newly introduced big screen television (Q1) and later it decreases the follow-up price by P2 and quantity Q2 in order to maximize its revenue.

Economics Concept Introduction

Price Skimming:

Price skimming is the temporary version of price discrimination through which a producer charges higher price for their newly introduced product in order to gain maximum profit.