average-cost pricing

average-cost pricing

  1. a pricing method that sets the PRICE of a product by adding a percentage profit mark-up to AVERAGE COST or unit total cost. This method is identical in most respects to FULL-COST PRICING; indeed, the terms are often used interchangeably.
  2. a pricing principle that argues for setting PRICES equal to the AVERAGE COST of production and distribution, so that prices cover both MARGINAL COSTS and FIXED OVERHEADS costs incurred through past investments. This involves the (sometimes arbitrary) apportionment of fixed (overhead) costs to individual units of output, though it does seek to recover in the price charged all the costs that would have been avoided by not producing the product.
See MARGINAL-COST PRICING, TWO-PART TARIFF.
References in periodicals archive ?
In the first case, the two jurisdictions are interconnected but keep their distinct market organization: one is competitive and the other follows an average-cost pricing regulation.
Harrison (1987) modified the above design to introduce sequential moves by the incumbent and the entrant and found stronger support for the contestable average-cost pricing outcome.
A communications network is characterized by (1) the existence of a large fixed cost for its construction; (2) a public monopoly that employs average-cost pricing; and (3) the presence of congestion effects.
Our view is that an appropriate nonlinear price schedule would be preferable to average-cost pricing if DFAS customers have any price elasticity.
Since price deviates from marginal cost, average-cost pricing in such cases is sometimes referred to as second-best pricing; "first-best" pricing would equate price to marginal cost, but would result in revenues less than costs.
Clearly, average-cost pricing in Figure 2 leaves no opportunity for a competitor to attract some piece of the market and at least cover its costs.
There have been a number of studies of the Federal Reserve's check-collection services, aimed at addressing this question.(15) These studies tend to find fairly weak scale economies in the observed range of production levels.(16) Such findings might seem at odds with the narrative description of the experience in check processing (and in ACH services), which seems to parallel the analysis of Section 2; average-cost pricing to the market as a whole led to the defection of high-volume users of the services.
This empirical study shows a dramatic improvement in the incentives created by equilibrium pricing compared to average-cost pricing. Management Sciences, June 1994, 40(6): 774-787.