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Basing point pricing (also known as delivered pricing) refers to a system in which a buyer must pay a price for a product inclusive of freight costs that does not depend on the location of the seller.

The freight costs may be calculated from a specific location or "basing point" from standard published freight rate schedules. Under this system, customers located near or far from the basing point pay the same price. Thus nearby customers are discriminated against or are charged "phantom" freight that they would not incur if they had a choice of paying separately for the product and for the freight charges. Conversely, the freight costs of distant customers are absorbed by the sellers. This practice has been extensively used in industries such as steel and cement and has been viewed as a method to facilitate collusion among firms.

In competition, prices are expected to reflect costs. Economists therefore expect FOB (free on board) plus actual freight costs to emerge in competition. However, firms even in competition may adopt a system of delivered pricing because it is simple and saves administrative costs. This is particularly the case when firms establish price zones within which transportation distances and costs do not vary very much. Moreover FOB pricing plus actual freight costs may be a better means of collusion because it facilitates allocation of customers geographically. In addition the practice may be adopted in order to deter locational entry by otherwise competing firms.

Source Publication:
Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.

Statistical Theme: Financial statistics

Created on Thursday, January 03, 2002

Last updated on Wednesday, March 27, 2013