Tesla has cut the prices of its most popular models by up to 20% in the U.S. and Europe in an effort to boost sales as competition intensifies — a move that ensures more of its models can qualify for a federal tax credit for electric vehicles.

The price cuts will make the Model Y, the best-selling electric vehicle in the U.S., eligible for the tax credit of $7,500, making it more competitive as demand for electric cars continues to increase.

Tesla stock dropped on the news, but analyst Daniel Ives of Wedbush says Tesla is playing the long game.

"This is a clear shot across the bow at European automakers and U.S. stalwarts (GM and Ford) that Tesla is not going to play nice in the sandbox with an EV price war now underway," Ives wrote in a note. "Margins will get hit on this, but we like this strategic poker move by Musk and Tesla."

Musk had signaled on an earnings call last fall that price cuts could be coming sometime in 2023.

Tesla stock plummeted in 2022 for a variety of reasons, including CEO Elon Musk's apparent distraction as he focused on his purchase of Twitter.

Cheaper than the average gas-powered vehicle

Among the price cuts, the Model Y long-range (the cheapest version available) will now have a base price of $52,990, a drop of $13,000.

That brings the price below a $55,000 price cap required to qualify for the revamped federal EV tax credits, giving it an effective price, for eligible buyers, of $45,490. That's well below the average price for a new vehicle in the U.S.

Previously, only the 3-row Model Y qualified for the credit, because it qualified for a higher price cap.

Other models were also cut. The Model 3's base price was cut by $3,000 to $43,990, or $36,490 after the federal tax credit.

There is a caveat on those federal tax credits, though. The eligibility rules are set to change in March, and there's no guarantee the vehicles will still qualify — and no guarantee that a custom ordered vehicle will arrive before the rules change.

Customers intent on getting a tax credit (for the Tesla or any other electric vehicle) may want to focus on vehicles available for purchase today, rather than waiting for an order.

Competition is getting a lot tougher

The price cuts comes as major automakers are releasing more electric vehicles, especially on the cheaper end of the market, cutting into Tesla's overwhelming dominance.

That's a major factor driving Tesla's aggressive pricing, along with supply woes that are finally easing and the new government incentives that are kicking in.

More broadly, vehicle affordability is a major concern for the auto industry right now.

Companies have been making extraordinary amounts of money as a vehicle shortage sent prices sky-high — but they also know they are driving away would-be buyers who simply can't pay $50,000 for a car (the average transaction price for a new vehicle these days is $49,507, according to the latest figures from Kelly Blue Book).

As supply chain woes start to ease, the number of vehicles available for sale is starting to rise. Analysts are watching to see which automakers respond by cutting prices and chasing market share.

And Tesla can move much faster to do that than its big rivals. Most automakers set the suggested price for their vehicle by model year, and consumers then negotiate their actual price at a dealership.

Tesla, on the other hand, sets prices directly on its website with no negotiation, and changes those prices whenever it likes.