Long-term lower price limit

In business administration, the long-term lower price limit is the minimum price calculated in cost unit accounting for a product or service that covers the total costs .

General

The lower price limit is part of the pricing policy of a company that, in competition with competitors, uses the market price as an instrument to increase the demand for its products or services through price reductions or to lower it through price increases. The price range extends from a lower price limit, at which profit is no longer possible, to an upper price limit, at which there is no longer any demand; in between are the prices of substitute products of the competition.

In the event of price reductions, the company must know the price at which the total costs or part of them can just be covered. When the lower price limit is reached, the company becomes a marginal provider . The long-term lower price limit should state that a company can maintain the minimum price in the long term without it becoming a threat to its existence. The short-term lower price limit, on the other hand, leads to losses that reduce equity and thus lead to a corporate crisis.

detection

With the long-term lower price limit , the total costs (i.e. variable costs and fixed costs ) are covered, but no profits are made, because the company produces at breakeven point : ${\displaystyle lPUG}$ ${\displaystyle K_{v}}$ ${\displaystyle K_{f}}$

${\displaystyle lPUG=K_{v}+K_{f}}$.

The associated production volume is referred to as the operating optimum . If you now divide the total costs by the production volume, the long-term lower price limit results as the price: ${\displaystyle M}$ ${\displaystyle K_{g}}$

${\displaystyle lPUG={\frac {K_{\mathrm {g} }}{M}}}$.

The total costs ( prime costs ) are covered by the sales revenue , but no profits are made because the company produces at breakeven point .

Alternatively, the long-term lower price limit is calculated by setting the first derivative of the unit cost function equal to zero and inserting the value obtained afterwards into the unit cost function. The associated x-value is called the operating optimum . The same result is obtained if the intersection of the marginal cost curve and the unit cost curve is calculated by setting both functions equal and then using the value obtained afterwards in the unit cost function . ${\displaystyle K'(x)}$ ${\displaystyle k(x)}$ ${\displaystyle k(x)}$

example

The variable costs are assumed to be 22,000 euros, the fixed costs 12,000 euros, so that the total costs are 34,000 euros. The long-term lower price limit is 85 euros for a production quantity of 400 pieces. This shows how significant the fixed costs are for a company. A reduction in fixed costs not only reduces the breakeven point (profit is generated earlier), but also has a disproportionate effect on the price.

Legal issues

According to the established case law of the Federal Court of Justice (BGH), the entrepreneur is fundamentally free to set his own prices within the framework of the current market economy- oriented economic system. According to this ruling, a time-limited offer of individual records below cost price without special circumstances is not necessarily anti-competitive. On the other hand, the permanent sale of products below the purchase price unduly affects smaller competitors and must therefore be prohibited in principle. The starting point of the legal dispute was the intervention of the Federal Cartel Office in the price war of the German food retail trade in September 2000 with the ban on Walmart , Aldi Nord and Lidl from selling products below the purchase price. The BGH forbade this practice if it was carried out by companies with market power over a longer period of time, but at least if they acted systematically.

economic aspects

In the price competition between companies for the same product or a comparable service, it can make sense to lower the sales price as a strategic action parameter in order to generate a higher sales volume . However, the price must be available as an action parameter for market behavior ( price adjuster in oligopoly or polypol ), because the quantity adjuster must offer at the given market price. Underemployment can be eliminated by lowering prices. The sales price can be reduced to the lower price limit, so that this represents the limitation of the price policy. Should the price fall below the lower limit, foregoing the sale fulfills the company's goals better than selling. If the price falls below the lower limit, products should be removed from the production program for economic reasons or the acceptance of an order or an order should be waived because it leads to losses .

Individual evidence

1. ^ Hermann Diller / Andreas Herrmann (eds.), Pricing Policy Manual: Strategy - Planning - Organization - Implementation , 2003, p. 140
2. ↑ BGH, GRUR 1990, 371 , 380
3. ↑ so still below the short-term lower price limit
4. ^ BGH, decision of November 12, 2002, Az .: KVR 5/02 = BGHZ 152, 361
5. ↑ Wolfgang Becker / Stefan Lutz, Gabler Compact Lexicon Modern Accounting , 2007, p. 182
6. ↑ Hans Raffée , Consumer behavior , in: Bruno Tietz (Ed.), Hand dictionary of the sales economy, 1974, Sp. 1025 ff.
7. ↑ Wolfgang Kilger, Introduction to Cost Accounting , 1985, p. 409

Please note the information on legal issues!