marginal pricing

Selling at a price that is above the marginal cost but below the total or full cost which includes all overheads. Marginal pricing is based on the assumption that since fixed and variable costs are covered by the current output level, the cost of producing any extra unit (marginal output) will comprise only of variable costs of additional labor and material consumed. Hence, the argument goes, any amount by which the selling price exceeds the variable costs incurred by the marginal output will be pure profit. However, in the long run, this is a ruinous assumption because the firm's competitors will be forced to lower their prices as well. And the customers will insist on these low prices as the norm while the firm, to survive, will still have to ensure its total revenue exceeds its total costs.