Basing Point Pricing System Definition
Basing point pricing refers to a pricing system whereby a company ensures its prices are determined by two components. First, a price is set by the company for the product. Then, the company establishes a shipment or freight price which is based on the location of the product’s buyer and how distant the customer is from a pre-planned location. The cost of freight based upon the customer’s distance from this base point is supposed to cover the extra cost of shipping a very heavy, expensive, and bulky item such as cars or steel. The buyer eventually pays a base price in addition to a fixed shipping cost depending on how far it is from the base location. Usually, the basing point and the manufacturing point are at the same location, and the distance of the customer or delivery location from that point determines the charge for shipping. However, this becomes controversial when the basing point differs from the real location of the shipped item. This may happen supposing that a good is produced in the factory but stored in the warehouse. In a situation where the factory is the basing point, then the distance from the warehouse to the delivery location might not be the same as the delivery location and the factory and there may be inaccuracy in the freight fee.
Basing point pricing and base point pricing mean the same thing.
A Little More on What is Base Point Pricing System
Basing point pricing refers to a pricing system which includes a fee for a good sold, in addition to a freight fee which is calculated based on the distance of the customer from a base, or starting point. The basing point pricing system, since inception, has been opposed as a result of its collusive, cartel nature. Big companies having an oligopoly on a good can create similar initial pricing for their good. Next, once a base point is established, only little incentive exists to build manufacturing plants in places outside of the area. Hence, competition tends to populate in a region, having few price differences.
An Example of Basing Point Pricing
For instance, the base point for an ABC Coal company is established at a mining facility in City XYZ reason being that the coal of ABC is produced there. Company D is situated 100 miles west of City XYZ. By the time Company D buys coal from ABC coal, a per pound price is paid for its order, after which an extra shipping charge based on the distance of Company D from City XYZ. Customer E is situated away from City XYZ by 50 miles, so their total cost for coal bought from ABC Coal would be less than the total price of Company D, in that their coal has a lesser distance to travel for delivery, thereby reducing the freight aspect of Company E complete bill.
References for Base Point Pricing
Academic Research on Base Point Pricing
Basing–point pricing: Competitive vs. collusive theories, Haddock, D. D. (1982). The American Economic Review, 72(3), 289-306.
Basing point pricing: Competition versus collusion, Thisse, J. F., & Vives, X. (1992). The journal of industrial economics, 249-260.
Basing point pricing and public policy, Kaysen, C. (1949). The Quarterly Journal of Economics, 63(3), 289-314.
Restrictive Incidence of Basing Point Pricing on Regional Development, Johnson, W. S. (1948). Geo. LJ, 37, 149.
On the strategic choice of spatial price policy, Thisse, J. F., & Vives, X. (1988). The American Economic Review, 122-137.
Basing–point pricing and the Stahlwerksverband: An examination of the “New Competitive School”, Hughes, J. W., & Barbezat, D. P. (1996). The Journal of Economic History, 56(1), 215-222.
Basing point pricing and production concentration, Soper, J. B., Norman, G., Greenhut, M. L., & Benson, B. L. (1991). The Economic Journal, 101(406), 539-556.
Imperfect competition theory and basing–point problems, Clark, J. M. (1943). The American Economic Review, 33(2), 283-300.
Pricing objectives in large companies, Lanzillotti, R. F. (1958). The American Economic Review, 48(5), 921-940.
Delivered pricing and multiple basing point equilibria: a reevaluation, DeCanio, S. J. (1984). The Quarterly Journal of Economics, 99(2), 329-349.
Delivered pricing, FOB pricing, and collusion in spatial markets, Espinosa, M. P. (1992). The Rand Journal of Economics, 64-85.