Several senior managers are strongly in favor of a penetration pricing

QUESTION

Several senior managers are strongly in favor of a penetration pricing policy. Which of the following, if true, strengthens their argument?

A) Research reveals that the market is not price sensitive.
B) There are significant economies of scale in production.
C) Prices could be raised once the introductory period is over.
D) The demand for operating systems is inelastic.
E) Most customers are extremely unsatisfied with most technology companies.

ANSWER

Answer: B
Explanation: B) If there are significant economies of scale in production (Choice B), then costs will fall as sales volume increases. This would give Doors an incentive to sell as many units as possible even if it made less per sale. So Choice B supports the case for a penetration pricing strategy, which involves selling as many units as possible and attracting a large market share. Choice A indicates that consumers do not mind whether the prices are high or low, which suggests that Doors would do better by charging a higher price. Choice C goes against the idea of an effective penetration pricing policy. The low price must help keep out the competition, and the penetration price must maintain its low-price position—otherwise, the price advantage may be only temporary. Choice D, like Choice A, weakens the argument. Charging a higher price is a good option when demand is inelastic. Choice E is too broad. We’re concerned with Doors’ decision, not technology companies in general.