I have worked in the betting industry for several years. And the reason I'm writing is to tell you that while (2) sound logical, it was not used during my time in the industry. Or to be more precise, of course the odds are adjusted all the time to balance the market, prevent arbitrage etc, but it was also very common to have a 'loss leader bet', usually on the favourite, where the betting company would take a loss or make very little money if the favourite wins (but if that happens the customers still don't make a lot, because the odds are already low, and betting on a favourite is not a winning strategy because the real fav loss probability is higher than the odds would suggest). OTOH what is also often done is when 'real odds' are very high (low probability), the odds that are offered are way lower than the probability would suggest. So if 'real odds' are 100:1, the company would offer 50:1, so, even taking into account the company margins, you as a customers are never offered anything close to the real probability and as a consequence unless you are exceptionally good can never make money (and if you do your are banned).

Strategy (2) doesn't tell you how to come up with the initial prices, and bookies can potentially lose a significant amount from giving "bad" initial prices. If an individual is winning a lot of money from a bookie repeatedly because of these bad initial prices, then it is a sign that they might have a better model than the bookie, and so it is in the bookie's interest to ban them, since sports betting is a zero-sum game: every dollar you win from a bookie is a dollar that the bookie loses.