Average Cost Pricing Rule

What is the 'Average Cost Pricing Rule'

The average cost pricing rule is 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. Rate Of Return Regulation

    A form of price setting regulation where governments determine ...
  2. Natural Monopoly

    A type of monopoly that exists as a result of the high fixed ...
  3. Monopoly

    A situation in which a single company or group owns all or nearly ...
  4. Franchised Monopoly

    Monopoly status given by the government to a company. A franchised ...
  5. Discriminating Monopoly

    A single entity that charges different prices, which are not ...
  6. Production Cost

    A cost incurred by a business when manufacturing a good or producing ...
Related Articles
  1. Markets

    How & Why Companies Become Monopolies

    Without competition, monopolies can raise prices and lower quality leaving consumers little choice. But monopolies can benefit consumers as well.
  2. Markets

    A History Of U.S. Monopolies

    These monoliths helped develop the economy and infrastructure at the expense of competition.
  3. Markets

    How a Monopoly Works

    In economics, a monopoly occurs when one company is the sole (or nearly sole) provider of a good or service within an industry. This potentially allows that company to become powerful enough ...
  4. Markets

    A History Of U.S. Monopolies

    Here are a few of the most notorious monopolies in U.S. history.
  5. Markets

    New Monopoly Edition Ditches Paper Money (HAS)

    Hasbro's latest version of Monopoly speeds up the classic game and reflects our movement towards a cashless society. It will still probably end friendships over the "free parking" rule, though.
  6. Managing Wealth

    5 Lessons Monopoly Teaches Us About Finance And Investing

    The game of Monopoly can increase your chances of having a better and useful understanding of prudent financial and investment principles.
  7. Markets

    Understanding a Free Market Economy

    Why would we want a free market economy?
  8. Markets

    Antitrust Defined

    Check out the history and reasons behind antitrust laws, as well as the arguments over them.
  9. Personal Finance

    Why We Need Antitrust Laws (MSFT, AAPL)

    A look at antitrust laws in the United States and the many anticompetitive practices they safeguard against.
  10. Markets

    History Of The U.S. Federal Trade Commission

    Since the early 1900s, the Federal Trade Commission has been working to protect U.S. citizens from corporations.
RELATED FAQS
  1. Are monopolies always bad?

    Learn why governments sanction some monopolies, such as monopolies over public utilities, and why these monopolies are good ... Read Answer >>
  2. What is a monopoly?

    Monopoly is a fun family game, but in real life, a monopoly can be dangerous to a country's economy. A monopoly occurs when ... Read Answer >>
  3. What are common examples of monopolistic markets?

    Discover what causes real instances of market monopoly, how it persists and where monopoly privilege is most common in the ... Read Answer >>
  4. What does it mean when a utility company has a natural monopoly on a market?

    Learn what it means when a utility company has a natural monopoly on a market and why natural monopolies are heavily regulated ... Read Answer >>
  5. How does a monopoly contribute to market failure?

    Read a simple overview of the theory of market monopoly, where it originated and some contemporary challenges to the classical ... Read Answer >>
  6. Are there any legal monopolies in America or Europe?

    Legal monopolies continue to exist in the United States and Europe despite the current trend against their recognition and ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center