Final answer:
Penetration pricing deters market entry by setting low prices that make the market unattractive to rivals due to higher initial unit costs and lower profit potential.option b.
Step-by-step explanation:
Penetration pricing is a strategy used by businesses to discourage rival companies from entering the market. The idea behind this approach is to set the price of a product or service at a level so low that it makes the market unattractive for potential competitors. This is due, in part, to the temporary high unit costs that competitors will face if they decide to enter the market. Additionally, the initial low price set by the firm implementing penetration pricing can signal a low profit potential, thus discouraging competitors who might be looking for markets with higher returns. While predatory pricing is another strategy that can include selling below average variable cost to drive competitors out, it is often hard to prove and is a violation of antitrust law.
Penetration pricing discourages rival companies from entering the market because competitors who enter the market will temporarily face higher unit costs. This is because the firm practicing penetration pricing sets its prices at a very low level initially, often below the production cost, to attract customers and gain market share. As a result, new entrants will find it difficult to compete with such low prices and may struggle to cover their production and operational costs. This acts as a deterrent and discourages rivals from entering the market.