Which pricing strategy sets prices very low to exclude potential new market entrants?

The pricing strategy that sets prices very low to exclude potential new market entrants is known as predatory pricing. This approach involves temporarily lowering prices below cost to attract customers away from competitors and make it unprofitable for new entrants to join the market. By doing so, a business can establish or maintain a dominant position in the market, knowing that new firms often lack the financial resources to sustain operations under such conditions.

Predatory pricing is often controversial and can raise legal and ethical questions, as it may lead to a lack of competition in the long term if competitors are driven out of the market. It is a strategy used when a firm is willing to incur short-term losses with the expectation that it will be able to raise prices once it has eliminated competition.

In contrast, price leadership refers to a situation where one firm sets the price that others in the market follow, rather than aggressively lowering prices to exclude entrants. Competition-based pricing involves setting prices based on the prices of competitors, without necessarily aiming to eliminate competition. Market skimming is a strategy where a company sets a high price initially and then gradually lowers it over time, often used for innovative products or technologies, rather than focusing on undercutting competitors to drive them out of the market.