How does penetration pricing discourage rival companies from entering the market?

• A. Usually none of the companies make much profit in this situation
• B. It signals a short-term leader advantage
• C. It leads to immediate market saturation
• D. Competitors who enter the market will temporarily face higher unit costs

Answer: (D)

Penetration pricing works by setting a very low price to win volume quickly, which makes entering the market unattractive for newcomers. The established firm can sustain low prices because of economies of scale, stronger distribution channels, and longer-standing supplier relationships, keeping their unit costs low as sales grow. A new entrant, by contrast, starts with small production runs and must invest in production capacity, marketing, and distribution. Those initial investments mean higher per-unit costs until they achieve substantial volume. With the price already set low, the margins for a new entrant can disappear, so the pull to enter the market is weakened. That’s why this approach helps discourage rivals from entering. The other options don’t capture this effect—their focus isn’t on the cost disadvantage new entrants face due to scale and setup costs.