Geographical Price Relations and Competition

Abstract

HE SUBJECT of geographical price relations may, at first glance, seem to be a highly specialized topic deserving only of the interest of the technical price statistician, but without much significance for the economic community at large. However, a more thorough analysis shows that this view is not quite correct. The existing geographical pricing systems have been, and are at the present time, being challenged by statutory regulations, hearings and examinations by federal agencies; so that the time is ripe for an analysis and review of the various concepts surrounding this matter. The subject is one which concerns all of us. Practically every industry and trade, consciously or unconsciously, engages in the practice of selling at prices which are differentiated upon a geographical basis. This fact may be quickly seen by an examination of the most typical or representative pricing systems prevalent in marketing. The distributor who sells in uniform price zones or at a uniform price over the entire country illustrates this situation. His delivered prices to consumers, within each zone or throughout the country, as the case may be, are uniform; but his prices at the mill are different for practically every district to which he sells. The net price which the producer obtains is the price paid by the consumer minus the delivery costs; thus resulting in a system of differentiated net prices due to varying delivery costs. A different system of geographical price differentiation is found in the case in which the producer practices freight equalization. The essence of freight equalization can be summarized in the fact that while inclusion in the delivered price of the full amount of freight incurred by the seller is regarded as th basis for the computation of delivered prices, an amount lower than actual freight will be included by any seller who has to compete with another seller who is freightwise more favorably located than the former. In this manner all prospective sellers competing for business at a given place qualize that element in their delivered prices, which represents freight, by reducing it o the lowest freight rate actually paid by an one of them. The difference between the amount recovered as part of the delivered price and the amount defrayed is absorbed by the seller. If this method of pricing is practiced, it is clear that the seller will obtain very different net yields on the individual sales made by him. Whenever he sells to a distant destination and has to abso b a substantial amount of freight, his n.t retu n will naturally be much lower than on sales made in his immediate vicinity or to points where he is not forced by competition to bsorb any freight. Similar to the freight equalization scheme n certain respects, though substantially different from it in others, is the system of basing point pricing. Under this system prices fo the commodity in question are quoted exclusively as of a certain basing point or basing points; and all sellers, regardless of their actual shipping points and the distances over which their goods are actually transported, charge the basing point price plus freight from the basing point to destination. In this system an element of fictitious 'A paper presented at the Annual Convention of the American Marketing Society, Nov. 27, 1936.