Basing Point Pricing System

What Is a Basing Point Pricing System?

A basing point pricing system is a geographic pricing strategy whereby companies determine a fee for a good sold, plus an additional freight charge that is calculated based upon the customer's distance from a starting, or “basing point.” Buyers located nearer to the basing point pay less for shipping than those based further away.

Understanding Basing Point Pricing Systems

Basing point pricing is also known as base point pricing and is generally used by oligopolies delivering homogeneous goods that are bulky and expensive to ship. Companies using this system base their prices on two components:

1. The company sets a base price for the product, which is how much it costs at the factory gate.
2. The company establishes a freight or shipment price that is based upon where the customer who is buying the product is located and how far away the customer is from a pre-determined location, known as the basing 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.

Typically, the basing point is the same location as the manufacturing point, meaning the shipping charge is determined based upon the customer or delivery location's distance from that point. However, this can become controversial when the basing point is different from the actual location from where the item is shipped.

This may occur if a company has several manufacturing plants but just one basing point or if a good is produced in a factory but then stored in a warehouse. If the factory is the basing point, the distance between the warehouse and the delivery location may not be the same as the factory and the delivery location and the freight fee may be inaccurate, leading to what is known as phantom freight.

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

Criticisms of Basing Point Pricing Systems

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

Basing point pricing was once common practice in the United States, especially in the steel, cement, and automotive industries. In 1948, the Supreme Court ruled in the case of the Federal Trade Commission (FTC) v. The Cement Institute, et al., that the industry-wide basing point system used in the cement industry led to unlawful price discriminations.

That ruling came 24 years after the FTC ordered the United States Steel Corporation (X) and seven of its subsidiaries, which combined produced about 50% of total rolled steel production in the United States, to stop abiding by what was known as the “Pittsburgh Plus” price system. The perpetrators sold their products at a base price and then added a freight charge. The latter fee was deemed to be 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.