Cost plus pricing – definition

Cost plus pricing is a pricing method that attempts to ensure that costs are covered while providing a minimum acceptable rate of profit for the entrepreneur. It is calculated by adding a fixed mark-up to average (or unit) costs of production.

Cost-plus pricing is common in markets where a few firms dominate (an oligopolistic market) and share similar production costs. In this case, cost-plus pricing provides a convenient rule for firms and reduces the risks associated with price competition.

Game theory suggests that if firms are able to tacitly collude by sharing a ‘pricing methods’ then collusion is harder to detect and difficult for regulators to penalise.