Advantages Of Long-Run Incremental Cost

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Prices based on short-run marginal costs and long-run incremental costs promote efficient production. However, the revenue derived on the basis of these two cost-concepts does not cover total costs because they do not account for all the costs that are incurred by a telecom operator. In contrast, fully-allocated costs cover all costs. Despite this, there is increasing emphasis on using long-run incremental costs for cost-based pricing because they promote efficiency, while fully-allocated costs foster inefficiency. Long-run incremental costs cover a greater portion of total costs than marginal costs, and incorporate dynamic elements such as technical change and economies of scale.
Different variants of long-run incremental costs can be calculated depending on the level of output, time period and technologies used. A wide coverage is provided by total service long-run incremental costs (TSLRIC), which
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This is done either by providing a range within which prices can be fixed by the operators, or by not extending price regulation to certain products (normally products with competitive markets or those that are not considered essential).
A flexible price range is usually provided under a price cap methodology, which imposes an upper limit on the average price increase for a basket of telecom services. This increase is specified under a formula which usually incorporates a need to decrease prices due to a rise in productivity. For certain specific services, sub-baskets are devised with conditions different from the overall basket. The price cap methodology provides considerable flexibility to take account of various policy objectives, including equity and efficiency of
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