This is my personal philosophy on undercutting:
I play the "undercut by 1 gil" game until I can't take it anymore. I play regularly and actively adjust prices while I am playing. I WILL undercut you by 1 gil everytime (this is actually doing you, my competitors, a favor). Reason being, undercutting by 1 gil will sell next, because the majority of players want the cheapest goods, even if it is only by 1 gil. So if my item sells, I make a maximum profit. If you come along and undercut me by 1 gil and yours sells first, then you maximize your profit and mine is next in line to sell -- win-win sortof. With that being said, undercutting by 1 gil does not mess up the economy for that particular item; while, the "thinks he's smart" competitor that comes along and undercuts me, you, or the next guy for 30%, 50%, or even more, DOES. In that case, I will STILL play the "undercut by 1 gil" game until I see fit. If I am still being marginally undercut, then I will make my own marginal undercuts and put out the item for as little as I can, while still making a profit. If the "think he's smart" competitor still comes along and continues to undercut even at my drastically low price, I will buy his item and relist both his item and my item for their original going prices.

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