Price skimming is a pricing policy where the manufacturer sets the highest initial price for his one-of-a kind product or service. Over a period of time the price is gradually lowered. Skimming is a process of repeatedly extracting cream from the top layers of milk and each time leaving behind milk with a lesser butter content. At the initial price the manufacture attracts the market segment which is least price-sensitive. Market segment is a term in economics used to refer to a set of people who have one or more characteristics in common due to which they demand similar products or services. When the demand of this segment is satisfied he lowers the price to draw the more price-sensitive market segment. With every reduction in price the manufacturer is skimming the maximum revenue from the market. This method successfully captures the consumer's surplus. The consumer surplus is the money a consumer saves when he buys a product for a amount of money less than the most he is willing to pay.

With the drop in prices from P1 to P2 the demand for the quantity increases from Q1 to Q2. Price skimming is also known as 'riding down the demand curve'. At the initial high price the manufacturer enjoys monopoly status for a short-term. With the rise in profits competitors are attracted and they come out with cheaper similar products. Price falls as competition increases. Price skimming largely depends on the inelasticity of demand. This means that the demand remains unaffected to change in price of goods or services.

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