CCI’s New Determination Of Cost Of Production Regulations
On May 6, 2025, the Competition Commission of India (CCI) has notified the Competition Commission of India (Determination of Cost of Production) Regulations, 2025 (Determination of Cost of Production Regulations) replacing the 2009 Regulations.[1] The main aim of these Regulations is to set out a procedure for the Competition Commission of India (CCI) to determine the “cost” of production, a vital factor in determining charges of abuse of dominant position under Section 4 of the Competition Act, 2002 (Act), specifically concerning cases of predatory pricing.
Update
The new regulations establish a more precise expression of different cost notions applicable to competition law proceedings. In particular, Regulation 2 establishes precise definitions for expressions like Average Variable Cost (AVC), defined as total variable cost divided by total output. The regulations stipulate in Regulation 3 that AVC will generally serve as the primary benchmark for evaluating whether pricing practices may be considered predatory. However, the framework also encompasses definitions for Total Cost, representing the entirety of production expenses, and Long Run Average Incremental Cost (LRAIC), which considers costs over an extended horizon, including capital investments.
A summary of the type of costs under these Regulations is as follows:
| S.No. | Type of Cost | Explanation |
| 1. | Average Variable Cost (AVC) | Defined as the total variable cost divided by the total output. Regulation 3 further clarifies that AVC will generally be taken as a proxy for marginal cost when determining “cost” under the Explanation to Section 4 of the Act. This aligns with established economic principles where marginal cost is often the benchmark for assessing predatory pricing. Variable costs are those that change with the level of production. |
| 2. | Total Cost | Encompasses all actual costs of production, including material, direct wages, direct expenses, depreciation, work overheads, quality control, R&D, packaging, and attributable administration overheads. This provides a comprehensive understanding of the overall cost structure. |
| 3. | Total Variable Cost | Calculated by deducting fixed costs and the share of fixed overheads attributable to the product from the total cost. This isolates the costs directly linked to the level of output. |
| 4. | Total Avoidable Cost | Refers to the costs that could have been avoided if the enterprise had not produced the extra output in question. This concept is particularly relevant in assessing the incremental impact of allegedly predatory behavior. |
| 5. | Average Avoidable Cost | Derived by dividing the total avoidable cost by the total output considered for its estimation. This provides a per-unit measure of avoidable costs. |
| 6. | Long Run Average Incremental Cost (LRAIC) | Includes all variable and fixed costs, including sunk costs, directly or indirectly attributable to the production of a specific product or service. For multi-product enterprises, it also includes a proportionate share of common costs attributable to the product in question. LRAIC is a broader cost concept that considers the long-term sustainability of pricing strategies. |
| 7. | Average Total Cost (ATC) | Calculated by dividing the total cost by the total output. ATC represents the overall per-unit cost of production. |
| 8. | Marginal Cost | Defined as the change in total cost resulting from a one-unit change in the quantity produced. While AVC is the general proxy, understanding the theoretical definition of marginal cost is important. |
A key modification lies in the enhanced discretion afforded to the CCI in the selection of the appropriate cost metric. While AVC is identified as the general proxy for marginal cost, Regulation 3 permits the CCI to consider other relevant cost concepts, such as ATC, average avoidable cost, or LRAIC, contingent upon the specific characteristics of the industry and market. This flexibility acknowledges the heterogeneity of economic environments and ensures that the cost analysis is contextually relevant. However, any deviation from the use of AVC must have a documented rationale from the CCI, thereby ensuring transparency and accountability in the decision-making process.
To ensure the technical correctness of the determinations of costs, Regulation 4 makes provisions for the use of experts. The CCI or the Director General can utilize the services of expert professionals in the area of expertise. In addition to this, the parties who oppose the cost figures arrived at by the CCI can seek the appointment of an expert, the cost of which is usually paid by the requesting party. The CCI also has the discretion to appoint its own choice of experts. This provision speaks to the acknowledgement of the technical intricacies involved in cost analysis.
Conclusion
The Determination of Cost of Production Regulations are a significant new development in the methodology for evaluating the cost of production in the context of competition law. Through more accurate definitions of suitable cost concepts and the introduction of an element of flexibility in the application based on particular industry characteristics, the CCI is now better able to identify and respond to instances of unfair pricing that would otherwise undermine competition.
Additionally, the provision for the option to include experts incorporates an element of sophistication in the process of cost assessment. These new regulations manifest an orientation towards a more economically sensitive and context-specific application of competition law in India, and it calls for careful attention on the part of businesses in deciding their price strategy.
[1] https://www.cci.gov.in/images/whatsnew/en/gazzette1746632546.pdf.
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