What is the purpose of limit pricing?

Limit pricing serves the strategic purpose of deterring potential entrants from entering a market. When an incumbent firm sets its prices lower than what would typically maximize its profits, it creates a barrier to entry for new competitors. This lower price level signals to prospective entrants that the market will not be profitable for them, as they would struggle to compete with the established firm that can sustain low prices due to greater economies of scale or a larger customer base.

By adopting limit pricing, the incumbent creates an environment that discourages new firms from investing resources into entering the market. This can maintain the monopolistic or oligopolistic position of the established firm, allowing it to preserve its market share and profitability in the long run. The other options do not accurately capture the primary objective of limit pricing, which focuses specifically on hindering competition through strategic pricing practices.