Copyright 2002 TecEd

Many electronic consumer items, such as TVs, computers and DVD players, reduce in price after their initial introduction onto the market. A DVD player, for example, would have cost in excess of £400 in the late 1990s but, in the early 2000s, now costs less than £200.

Why is this? Partly it is to do with a pricing strategy based on getting a quick return on all of the research and development costs involved in designing a new product. Partly it is to do with the behaviour of customers. “Early adopters” are a type of customer who are desperate to get hold of the latest gadget: they will pay a high price. As time goes by, the company will lower its price to attract more “conservative” customers. This is the basis for a skimming price strategy.

In terms of supply and demand analysis, the reason is a little less obvious. Surely, as more and more people decide they should have a DVD player, the demand curve will shift to the right. Wouldn’t this increase the market price??

Something else must be going on.

Task
Using a supply and demand diagram, analyse why the price of DVD players has decreased by such a large amount since their introduction. (C2)