LRIC
Encyclopedia
LRIC or LRAIC is an abbreviation for "Long-Run Average Incremental Cost". A LRIC model is often used in telecommunications regulation to determine the price paid by competitors for services provided by an operator with significant market power
, usually the incumbent
(former monopoly
).
Each of LRIC's components are analysed below.
Long run
Long run 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, 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.
Market power
In economics, market power is the ability of a firm to alter the market price of a good or service. In perfectly competitive markets, market participants have no market power. A firm with market power can raise prices without losing its customers to competitors...
, usually the incumbent
Incumbent
The incumbent, in politics, is the existing holder of a political office. This term is usually used in reference to elections, in which races can often be defined as being between an incumbent and non-incumbent. For example, in the 2004 United States presidential election, George W...
(former monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
).
Each of LRIC's components are analysed below.
Long run
Long run 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, leased lines, etc) include those provided by the operator with significant market power
Market power
In economics, market power is the ability of a firm to alter the market price of a good or service. In perfectly competitive markets, market participants have no market power. A firm with market power can raise prices without losing its customers to competitors...
, 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.