Long-run incremental cost (LRIC) is a method used to assess whether a company is pricing its product too low to eliminate competition. It takes into account all the costs that would not exist if the product was not being sold over a span of several years. Unlike the immediate production cost, LRIC considers certain expenses that may remain constant in the short term but can vary over a longer period depending on the product’s availability in the market. LRIC is commonly employed in antitrust cases to determine if a company is involved in predatory pricing.
Long-run incremental cost (LRIC) is a cost threshold utilised in antitrust law to assess the occurrence of predatory pricing. It encompasses all expenses that would not be incurred over a span of multiple years if a specific product was not offered. This cost differs from average variable cost as it includes certain expenses that do not fluctuate in the short term but do vary over a longer duration, depending on the presence of a particular product. For instance, suppose a company aims to enter a new market and opts to offer a product at an extremely low price to eliminate competitors. The company’s average variable cost for manufacturing the product is $10, but its long-run incremental cost amounts to $15. This implies that even if the company ceases to offer the product, it would still have to bear $15 in expenses over several years. Consequently, if the company sells the product for less than $15, it is engaging in predatory pricing. Another scenario could involve a company seeking to expand its business by acquiring a smaller competitor. The antitrust authorities may employ LRIC to determine if the acquisition would grant the larger company excessive market power, enabling it to engage in predatory pricing.
The long-run incremental cost (LRIC) is the additional cost incurred by a firm when it increases its output or expands its production capacity in the long run.
The short-run incremental cost (SRIC) only considers the additional cost incurred in the short run when a firm increases its output, while LRIC takes into account all costs associated with expanding production capacity in the long run.
LRIC is often used in legal matters, such as antitrust cases or regulatory proceedings, to determine the appropriate pricing and market behavior of firms. It helps assess whether a firm’s pricing practices are fair and reasonable.
Calculating LRIC involves considering all relevant costs associated with expanding production capacity, including capital costs, operating costs, and any other expenses directly related to increasing output in the long run.
Yes, LRIC can be used to determine the fair price of a product or service. By considering all costs associated with expanding production capacity, it provides a more accurate assessment of the true cost of production, which can help determine a fair price.
LRIC plays a crucial role in ensuring fair competition in the market. By considering all costs associated with expanding production capacity, it helps prevent firms from engaging in predatory pricing or anti-competitive practices that could harm competition.
Yes, LRIC can be used to assess the efficiency of a firm. By comparing the firm’s actual costs with the LRIC, it helps determine whether the firm is operating efficiently or if there are any inefficiencies in its production process.
Yes, there are limitations to using LRIC in legal matters. It relies on accurate cost data, which may not always be readily available. Additionally, LRIC calculations can be complex and require expert analysis.
Regulatory decisions often rely on LRIC to determine the appropriate pricing and behavior of regulated firms. It helps regulators ensure that prices are fair and reasonable, and that firms are not engaging in anti-competitive practices.
Yes, LRIC can be used in international trade disputes. It can help assess whether a foreign firm is engaging in unfair trade practices, such as dumping, by comparing the firm’s pricing with the LRIC to determine if it is selling products below cost.
This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.
This glossary post was last updated: 17th April 2024.
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