Definition of the base point pricing system


What is a basis point pricing system?

A basis point pricing system is a geographic pricing strategy whereby companies determine a rate for a good sold, plus an additional freight charge that is calculated based on the customer’s distance from a starting point or ” base point “. Buyers located closer to the base point pay less for shipping than those farther away.

Key takeaways

  • In a base point pricing system, the buyer pays a base price, plus a shipping fee based on distance from a specific location.
  • The cost of the freight is intended to cover the additional cost of shipping something that is very heavy, bulky, and expensive, such as cement, steel, or automobiles.
  • The basis point pricing system has been accused of a lack of transparency and collusion, behavior that is synonymous with cartels.

Understanding Base Point Pricing Systems

The base point price is also known as the base point price and is generally used by oligopolies that deliver homogeneous goods that are bulky and expensive to ship. The companies that use this system base their prices on two components:

  1. The company sets a base price for the product, which is what it costs at the factory gate.
  2. The company sets a freight or shipping price that is based on where the customer buying the product is located and how far the customer is from a predetermined location, known as the base point.

This additional charge is intended to cover the additional cost of shipping something that is very heavy, bulky, and expensive, such as cement, steel, or automobiles.

Generally, the base point is the same location as the manufacturing point, which means that the shipping cost is determined based on the distance of the customer or the place of delivery from that point. However, this can become controversial when the base point is different from the actual location the item is shipped from.

This can happen if a company has multiple manufacturing plants but only one basis point or if a good is produced in a factory but then stored in a warehouse. If the factory is the base point, the distance between the warehouse and the place of delivery may not be the same as the factory and the place of delivery, and the freight rate may be inaccurate, leading to what is known as phantom freight.

In other words, a buyer located near a non-base plant from which the item is shipped pays more for delivery than a customer located closer to the base point but further from the destination where the items are shipped.

Important

Shipping costs are included in the price, so the buyer does not have the option of organizing their own transport.

Criticisms of base point pricing systems

Since its inception, the basis point pricing system has encountered opposition due to its collusive nature that is synonymous with cartels. Large companies with an oligopoly on a good can set a similar starting price for their product. Next, once a starting point is established, there is little incentive to establish manufacturing plants in out-of-area locations. Therefore, competition tends to be concentrated in a region with few price differences. Assuming that all firms abide by the basis point pricing system agreement, price competition is avoided and market share is maintained.

Base point pricing was common practice in the United States, especially in the steel, cement, and automotive industries. In 1948, the Supreme Court ruled in the Federal Trade Commission (FTC) case against the Cement Institute, et al., That the industry-wide base point system used in the cement industry led to illegal discrimination. of prices.

That ruling came 24 years after the FTC ordered the United States Steel Corporation (X) and seven of its subsidiaries, which together produced about 50% of total rolled steel production in the United States, to stop comply with what was known as the “Pittsburgh Plus” pricing system. The perpetrators sold their products at a base price and then added freight. This latter fee was deemed unfair as shipments were often made from a plant or warehouse closer to the point of delivery than Pittsburgh. This information was not disclosed to buyers.

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Mark Holland

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