Basing Point Pricing and Production Concentration

Abstract

Basing point pricing is a delivered price system in which the price quoted for delivery of a commodity is the sum of the price quoted at a predetermined basing point plus the cost of transportation from the basing point to the point of delivery, whether or not the commodity is actually shipped from the basing point. Thus, a seller who is not located at the base site absorbs freight for shipments toward the base point and charges phantom freight on shipments away from the base point. Basing-point pricing has been widely practiced throughout the world. For example, testimony of the Federal Trade Commission before the TNEC (I 94 I, p. 33) alleged that industries in the United States which then or previously followed basing-point pricing included: lumber, iron and steel, pig iron, cement, lime, brick, asphalt, shingles and roofing, window glass, white lead, metal lath, building tile, floor tile, gypsum, plaster bolts, nuts and rivets, cast iron, soil pipe, range boilers, valves and fittings, sewer pipes, paper and paper products, salt, sugar, corn derivatives, industrial alcohol, linseed oil, fertilisers, chemicals, transportation equipment, and power cable. Almost from its inception, economists have generally considered basingpoint pricing to reflect a cartel or price leadership arrangement (Hoover, I937; Stigler, I949; Machlup, I949) and such practices have been attacked under antitrust statutes; for example, Aetna Portland Cement Co. vs. FTC, I 57 F. 2nd 533 (I946), Triangle Conduit Cable Co. vs. FTC, i68 F. 2nd I 75, 7th Cir. (I 948), Cement Institute vs. FTC, I57 F. 2nd 533 (I948). Nonetheless, basing-point pricing remains prevalent, particularly outside the United States. OPEC has used a Gulf-based price plus transport costs to determine the delivered prices of crude oil to most places in the world, Haddock (i982, p. 290), the pricing of cement in Great Britain and steel in Europe can be characterised as multibase point systems: Greenhut (I987). Recent attempts by, for example, Haddock (i982) to return to the theme that the basing-point system could be competitive and desirable have been challenged by Thisse and Vives (i988), and Benson et al. (I990) on the basis of recent advances in the analysis of pricing policy. Given, then, that we assume basing-point pricing to be a collusive device adopted by incumbent firms to impose some kind of price discipline on potential entrants the price leadership point referred to above important strategic and locational issues arise. In particular, a major concern of the early analysis of basing-point pricing was the effect such a pricing policy would have on location choice of entrant firms.