Legal Definitions - long-run incremental cost

Long-run incremental cost (LRIC) refers to all the additional costs a company would incur over a period of several years specifically because it offers a particular product or service. Conversely, these are the costs that would disappear if the company stopped offering that product or service over the long term.

This concept is crucial in antitrust law, particularly when regulators assess whether a company is engaging in "predatory pricing"—selling a product below its cost to drive out competitors. LRIC helps determine the true long-term cost of offering a specific product, including costs that might seem fixed in the short term but would ultimately be avoided if the product were discontinued over a longer period (e.g., specialized equipment, dedicated personnel, or long-term contracts).

• Example 1: Launching a New Streaming Service

  Imagine a major media company deciding to launch a brand-new, niche streaming service dedicated solely to independent documentaries. The long-run incremental costs for this new venture would include the multi-year licensing fees for the documentary content, the salaries and benefits for a dedicated team of content curators and technical support staff hired specifically for this service, and the long-term server infrastructure investments required to host and deliver the content. If the company decided not to launch this specific documentary streaming service, these particular content licenses, dedicated staff salaries, and specialized server costs would not be incurred over the several-year period.

• Example 2: Expanding a Pharmaceutical Product Line

  A pharmaceutical company considers developing and manufacturing a new drug for a rare disease. The long-run incremental costs associated with this specific drug would encompass the multi-year research and development expenses, the construction or repurposing of a specialized manufacturing facility dedicated to its production, the long-term contracts for unique raw materials, and the salaries of a dedicated sales and marketing team focused solely on this new medication. If the company chose not to pursue this particular drug, all these specific R&D investments, facility costs, material contracts, and dedicated personnel expenses would be avoided over the long run.

• Example 3: Introducing a Specialized Banking Product

  A retail bank plans to offer a new, highly specialized financial product, such as a bespoke wealth management service for ultra-high-net-worth individuals. The long-run incremental costs for this service would include the recruitment and training of a new team of highly specialized financial advisors, the development and maintenance of proprietary software platforms tailored for this client segment, and the long-term lease of a dedicated, discreet office space for these clients. If the bank decided against offering this specific wealth management service, these particular advisor salaries, software development costs, and specialized office lease payments would not be part of its long-term expenditures.