Defining Price Skimming - Price skimming is when a firm charges a reasonably high price on entering a market and there after reduces prices as consumers start a bargaining process and other firms start coming in.
Price skimming is mainly seen in disorganised markets where all the competitors are present in close proximity from one another and the consumer has access to all the competitors without incurring a great deal of search costs.
Example of Skimmed Markets - A very good example of a market where price skimming is practiced is the fisheries market on the northern cost of the United Kingdom.
Fishermen come in with their daily catch from the North Sea at around 8 pm in the evening.
Thereafter they sell their fish to the various retail outlets that come in and buy the fish from the fisherman and sell it across the United Kingdom either as frozen, canned or cooked fish.
The motive for the fishermen is to catch as much fish as they can fit in their boat and sail back to the coast as quickly as possible.
Thereby whoever is first to the coast can sell it at a relatively high price before their competitors sail in.
The fisherman obviously have to keep in mind the price at which there will be no demand at all and have to quote for a lower price such that there is some initial demand, thereafter the fishermen continue to lower prices depending on how many fishermen enter with what quality of fish and how the consumers behave.