Answer: As with most plants, peppers will do best in a soil that is not compacted. Terra cotta can be problematic in that it is porous and allows moisture to evaporate through it and that can make it difficult to keep the soil evenly moist; overwatering combined with a heavy, poorly drained soil can combine to cause root rot problems, too. Some potting mixes tend to pack down almost immediately. For this reason, you may find that a soilless mix (based on peat moss or possibly bark along with perlite and maybe vermiculite as well) works better, particularly for outdoor container plants where rain can beat down on them and compact the soil in addition to frequent watering. It might also be that the plant simply needs to be fertilized. However, it may not be a problem with the soil but instead that the plant failed to root into the surrounding soil and is dwarfing itself, or that it has been stressed for lack of water or even too much water, or it was stressed at some point before you bought it and as a result is stunted. It's a bit difficult to make a guess as to the problem based on one plant's performance, especially given all the possible causes, but maybe this will help you troubleshoot.
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