Price Floors & Ceilings

Skim and penetration pricing of new products are specific cases of strategic pricing leeway stemming from market imperfections and downward sloping demand curves.

In a broader context, pricing decisions (i.e. how much to charge for specific products) are typically "bracketed" between a price floor (the lowest price acceptable to the company) and a price ceiling (the highest price that "the market will bear" without jeopardizing a firm's competitive position).  

More specifically, a price floor is the lowest price that achieves the firm's profit objectives.  For so-called normal goods with no significant complementary or futures-related profit-generating sales to consider, the price floor is a function of appropriately determined, relevant product costs (see analytical note below) and the firm's profit objectives .  A firm's profit objectives may be set on various metrics: percentage profit margins (ratio of profit to sales), total profit dollars, return on investment (ROI), etc.  In general, ROI-based measures are most appropriate, though other measures may be adequate operational proxies.

Under perfect market conditions (many substitutes, highly fragmented, full information, rational decisions), the price ceiling is the equilibrium (or prevailing) market price, which is determined in the market by the industry's supply and demand characteristics.

In theory, no sales will materialize in a perfect market at prices set higher than the market price.  So the market price is a hard price ceiling.

More generally, a price ceiling is a function of the relative perceived value that a product delivers in the marketplace.