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Simple English definitions for legal terms
long-run incremental cost
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A quick definition of long-run incremental cost:
Long-run incremental cost is a way to figure out if a company is selling a product at a price that is too low to drive competitors out of business. It looks at all the costs that would not be there if the product was not being sold over a few years. This is different from just looking at the cost of making the product right now. Long-run incremental cost includes some costs that do not change in the short term but can change over a longer period of time depending on whether the product is being sold or not. It is abbreviated as LRIC and is used in antitrust cases to determine if a company is engaging in predatory pricing.
A more thorough explanation:
Long-run incremental cost (LRIC) is a cost threshold used in antitrust law to determine if predatory pricing has occurred. It includes all costs that would not be incurred over a period of several years if a particular product was not offered. This cost differs from average variable cost because it includes some costs that do not vary in the short run but that do vary over a longer period, depending on whether a particular product is offered.
For example, let's say a company wants to enter a new market and decides to offer a product at a very low price to drive out competitors. The company's average variable cost for producing the product is $10, but its long-run incremental cost is $15. This means that if the company were to stop offering the product, it would still have to pay $15 in costs over a period of several years. Therefore, if the company sells the product for less than $15, it is engaging in predatory pricing.
Another example could be a company that wants to expand its business by acquiring a smaller competitor. The antitrust authorities may use LRIC to determine if the acquisition would result in the larger company having too much market power and being able to engage in predatory pricing.