Question: What advantages would a lower price penetration strategy have of

What advantages would a lower price penetration strategy have offered Euro Disney? Do you see any drawbacks?

A firm with a new product or service may be in a temporary monopolistic situation. If there is little or no present and potential competition, more discretion in pricing is possible. In such a situation (and, of course, Euro Disney was in this situation), one of two basic and opposite approaches may be taken in the pricing strategy:
(1) Skimming
(2) Penetration.
Skimming is a relatively high-price strategy. It is the most tempting where the product or service is highly differentiated, since it yields high per-unit profits. It is compatible with a quality image. But it has limitations. It assumes a rather inelastic demand curve, in which sales will not be appreciably affected by price. And if the product or service is easily imitated (which was hardly the case with Euro Disney), then competitors are encouraged because of the high profit margins.
The penetration strategy of low prices assumes an elastic demand curve, with sales increasing substantially if prices can be lowered. It is compatible with economies of scale, and discourages competitive entry. The classic example of penetration pricing was the Model T Ford. Henry Ford lowered his prices to make the car within the means of the general public, expanded production into the millions, and in so doing realized new horizons of economies of scale.
Euro Disney correctly saw itself in a monopoly position; it correctly judged that it had a relatively inelastic demand curve with customers flocking to the park regardless of rather high prices. What it did not reckon with was the shrewdness of European visitors: Because of the high prices, they shortened their stay, avoided the hotels, brought their own food and drink, and only bought sparingly the Disney merchandise.

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  • CreatedAugust 18, 2012
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