LRIC or LRAIC (the distinction between the two is presented below) is an abbreviation for "long-run average incremental cost".
A LRIC model is often used in
telecommunications
Telecommunication, often used in its plural form or abbreviated as telecom, is the transmission of information over a distance using electronic means, typically through cables, radio waves, or other communication technologies. These means of ...
regulation to determine the price paid by competitors for services provided by an operator with significant
market power
In economics, market power refers to the ability of a theory of the firm, firm to influence the price at which it sells a product or service by manipulating either the supply or demand of the product or service to increase economic profit. In othe ...
, usually the
incumbent
The incumbent is the current holder of an office or position. In an election, the incumbent is the person holding or acting in the position that is up for election, regardless of whether they are seeking re-election.
There may or may not be ...
(former
monopoly
A monopoly (from Greek language, Greek and ) is a market in which one person or company is the only supplier of a particular good or service. A monopoly is characterized by a lack of economic Competition (economics), competition to produce ...
).
Components
Each of LRIC's components is analysed below.
Long run
Long run
In economics, the long-run is a theoretical concept in which all markets are in equilibrium, and all prices and quantities have fully adjusted and are in equilibrium. The long-run contrasts with the short-run, in which there are some constraints a ...
implies that all inputs are considered variable. In other words, even capital equipment can vary in response to a change in demand.
Average
LRAIC can be defined as including all the costs of services provided within an increment. In the context of telecommunications, LRAIC has often been used to set interconnection charges with the increments usually defined as the whole group of services using the core network. These services (
PSTN
The public switched telephone network (PSTN) is the aggregate of the world's telephone networks that are operated by national, regional, or local telephony operators. It provides infrastructure and services for public telephony. The PSTN consists ...
, leased lines, etc.) include those provided by the operator with significant market power, as well as those of interconnecting operators. The costs of the network providing this wider group of services are then divided by all the traffic to produce the average incremental cost. LRIC (long-run incremental cost), in contrast, can be defined more narrowly to include the costs of adding or removing a defined quantity of traffic, or the addition or removal of a smaller set of services, such as local calls, within the broader LRAIC increment.
Incremental
In principle, there are an infinite number of different sized increments that could be measured. However, these increments can effectively be grouped into three different categories: 1. a small change in the volume of a particular service; 2. the addition of a whole service; or 3. the addition of a whole group of services. The first definition of the increment is equivalent to a measurable version of marginal cost, that is the cost associated with providing a very small, literally infinitesimal change in output. The second definition may apply to services of very different sizes, such as interconnection, local calls and premium-rate calls.
References
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Telecommunications economics