Which pricing strategy involves setting prices based on competitors' prices?

The chosen answer identifies competitive pricing as the strategy where prices are set based on the prices of competitors. This approach enables businesses to remain relevant within the market by aligning their pricing with what customers expect from similar products or services. By analyzing competitors' prices, a company can adjust its own pricing strategy to attract customers while ensuring that they do not undervalue or overvalue their offerings.

Using competitive pricing allows a business to effectively position itself in relation to competitors, fostering a more strategic market presence. This tactic is particularly useful in markets with similar products, where price competition can heavily influence consumer purchasing decisions. By being aware of competitors' pricing, businesses can also respond quickly to market changes, helping to maintain their market share and customer loyalty.

The effectiveness of competitive pricing is most evident in industries where there is little differentiation between products, making consumers more price-sensitive. As a result, businesses opting for this strategy can encourage customers to choose their offerings based on price rather than quality or brand loyalty alone.

Other strategies such as dynamic pricing, which involves fluctuations based on demand, cost-plus pricing, emphasizing cost considerations, and penetration pricing, where businesses set low prices initially to gain market entry, do not directly focus on competitor prices as the main driving factor.