Average Cost Pricing Rule

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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.

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