Basing-point pricing system

Updated: Aug 20, 2021

A form of price system used in industries characterized by (a) a relatively small number of seilers, (b) marked differences in location between buyers and seilers, (c) a product which has high weight and bulk relative to its value, so that transport costs constitute an important proportion of the final” price, (d) high capita! intensity, and (e) a tendency for marked cyclical and regional fluctuations in demand. Perfect examples of industries with these characteristics are cement and iron and steel, both of which have used a bas1ng-point pricing system. The system works in the following way. Some number (varying from one to all) of the plants in an industry are designated ‘bases’, and a base price is set which is price ‘at the factory gate’. A standard system of freight charges _is then laid down, which may vary with distance from the base, e.g. £10 per ton-mile for deliveries within a five-mile radius, £8 per ton-mile for deliveries of between five and ten miles, £7 per ton-mile for deliveries of between ten and fifteen miles, etc, All base prices and the standard freight charges are known to each seller. Given a buyer at any location, each seller calculates the price he quotes as the base price at the base nearest to the buyer plus standard freight charges from that base to the buyer. Prices are always delivered prices, i.e. the buyer always pays delivery charges as part of the price and does not effectively have the option of arranging his own transport and paying the price exclusive of transport costs. The inevitable result of the system is that all seilers will quote identical delivered prices to a buyer at any given location.

A major advantage of the system to the firms using it is that it ensures that prices will be uniform in an uncertain and unstable environment, and it thus restricts both deliberate and accidental price competition. This may be particularly important in an industry with high over­heads and prone to the development of excess capacity from time to time. It also permits firms to obtain business in areas outside their main market areas without having to reduce prices within their main market areas, which implies in effect price discrimination as between nearer and more remote customers. For example, suppose that a firm is forty miles further away from a customer than the base nearest the customer. Freight charges included in the delivered price are calculated from the base to the customer, and so the firm’s actual transport costs are likely to be much higher. In effect, therefore, the firm is reducing its price to the new customers. This ability to gain new business, while not losing profits on business the firm can be more sure of, has been considered by some economists to be the major attraction of the system.

Reference: The Penguin Dictionary of Economics, 3rd edt.

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James Knight
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James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.