In a competitive market, a firm may set low prices primarily to achieve which of the following objectives?

• A. Maximize short-run profits by raising prices above competitors
• B. Discourage new firms from entering the market
• C. Increase market share by attracting more customers
• D. Reduce production costs through economies of scale

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the context of a competitive market where many firms sell similar products and no single firm can influence the market price significantly.
2. Step 2: Recognize that setting low prices can be a strategic decision rather than simply maximizing short-run profits, as raising prices above competitors usually reduces demand for the firm’s product.
3. Step 3: Analyze the objective of discouraging new firms from entering the market, which can be achieved by setting prices low enough to reduce potential entrants' expected profits, acting as a barrier to entry.
4. Step 4: Consider the goal of increasing market share by attracting more customers through lower prices, which can lead to higher sales volume and potentially greater long-term profits.
5. Step 5: Evaluate the option of reducing production costs through economies of scale, which is generally a result of increased output rather than a direct reason for setting low prices initially.