Final answer:
A market penetration pricing strategy is used to set lower prices to build market share rapidly. It can be a fine line between aggressive penetration pricing and predatory pricing, where prices are set below variable costs to eliminate competition. Oligopolists may use price matching to maintain market stability.
Step-by-step explanation:
A market penetration pricing strategy calls for setting price levels that are low enough to quickly build market share. This approach can be effective in industries with small economies of scale compared to market demand or when a firm wants to establish itself quickly in the market against well-respected competitors with strong brand names. Penetration pricing can be an aggressive tactic, potentially viewed as predatory pricing, particularly if prices are dropped below average variable costs to drive out new entrants. This can lead to a pattern of pricing aimed at deterring firms from entering the market. However, it's often legally and practically challenging to determine when pricing is predatory.
In contrast, oligopolists might match price cuts from competitors but not price increases, maintaining a status quo that avoids price wars but also deters competition and price adjustments. This silent form of cooperation might help maintain monopoly-like profits without a formal agreement. Both penetration and predatory pricing strategies reflect the complexity of pricing decisions in competitive markets.