The manufacturer of a new kind of fat-free ice cream that has the consistency and taste of regular ice cream is thinking of using a penetration pricing strategy for its new product. Which of the following conditions would argue against using a penetration pricing strategy for the tasty, fat-free ice cream?
A) The ice cream market is highly elastic.
B) A large portion of the market has inelastic demand for ice cream over a broad range of prices.
C) Economies of scale in production would be substantial.
D) Retailers are not willing to pay for new brands of premium ice cream in the already overcrowded category.
E) Once the initial price is set, it is nearly impossible to lower prices without alienating buyers.

Question

Quizplus · Accepted Answer

If a large portion of the market has inelastic demand for ice cream, it means that consumers are not very sensitive to price changes. In such a case, a penetration pricing strategy, which involves setting a low initial price to gain market share, would not be effective because consumers would not significantly increase their quantity demanded in response to lower prices.

The Manufacturer of a New Kind of Fat-Free Ice Cream