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It doesn't say exactly what it does on that battle type screen. What does it do?

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Mew's answer doesn't quite explain what the option does.
Ah okay

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>PSS battles let you set up a handicap before battling. If you set up a handicap, you can change the number of Pokémon participating in that battle. This is a way to level the field before battles between players of different skill levels.

Official Pokemon Site.

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