Average Cost Pricing Rule

DEFINITION of 'Average Cost Pricing Rule'

A pricing strategy that regulators impose on certain businesses to limit the price they are able to charge consumers for its products/services equal to the costs necessary to create the product/service. This implies that businesses will set the unit price of a product relatively close to the average cost needed to produce it.

BREAKING DOWN 'Average Cost Pricing Rule'

This pricing method is often imposed on natural, or legal, monopolies. Certain industries (such as powerplants) benefit from monopolization, since large economies of scale can be achieved.

However, allowing monopolies to be unregulated can produce economically harmful effects, such as price fixing. Since regulators usually allows the monopoly to charge a small price increase amount above of cost, average cost pricing looks to remedy this situation by allowing the monopoly to operate and earn a normal profit.

RELATED TERMS
  1. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased ...
  2. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given ...
  3. Price Fixing

    Establishing the price of a product or service, rather than allowing ...
  4. Value-Based Pricing

    The setting of a product or service's price, based on the benefits ...
  5. Monopoly

    A situation in which a single company or group owns all or nearly ...
  6. Pricing Power

    An economic term referring to the effect that a change in a firm's ...
Related Articles
  1. Economics

    What Are Economies Of Scale?

    Is bigger always better? Read up on the important and often misunderstood concept of economies of scale.
  2. Economics

    Economics Basics

    Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more!
  3. Personal Finance

    Antitrust Defined

    Check out the history and reasons behind antitrust laws, as well as the arguments over them.
  4. Economics

    Economist Guide: 3 Lessons Karl Marx Teaches Us

    Read about three lessons that modern economic thinkers can learn from German philosopher Karl Marx, the founding father of communism.
  5. Fundamental Analysis

    The 3 Best Investments When Bull Markets Slow Down

    Find out why no bull market lasts forever, and why investors should shift their assets away from growth and toward dividends when stocks slow down.
  6. Economics

    Industries That Thrive On Recession

    Recessions are not equally hard on everyone. In fact, there are some industries that even flourish amid the adversity.
  7. Economics

    Economist Guide: 3 Lessons Adam Smith Teaches Us

    Learn three critical lessons about economics from 18th century philosopher Adam Smith, considered by many to be the father of economics.
  8. Fundamental Analysis

    How Globalization Affects Developed Countries

    The increase in communications technology has companies competing in a global market.
  9. Term

    What's the Economy?

    The economy is the production and consumption activities that determine how scarce resources are allocated in an area.
  10. Markets

    What Saudi-Iranian Tensions Mean for Oil Prices

    The recent break in diplomatic relations between Saudi Arabia and Iran adds complications to the already chaotic environment of Middle East geopolitics. 
RELATED FAQS
  1. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
  2. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>
  3. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  4. What does marginal utility tell us about consumer choice?

    In microeconomics, utility represents a way to relate the amount of goods consumed to the amount of happiness or satisfaction ... Read Full Answer >>
  5. What is the difference between JIT (just in time) and CMI (customer managed inventory)?

    Just-in-time (JIT) inventory management focuses solely on the need to replenish inventory only when it is required, reducing ... Read Full Answer >>
  6. What are some examples of Apple and Google's best-selling product lines?

    There are many good examples of product lines in the technology sector from some of the largest companies in the world, such ... Read Full Answer >>
Hot Definitions
  1. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  4. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  5. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
Trading Center