DEFINITION of 'Basing Point Pricing System'

A pricing system in which the buyer pays a base price plus a set shipping price depending on the distance from a specific location. The basing point pricing system sets a predetermined location, known as the basing point, then adds a transportation charge depending on how far away the buyer is from that location. Typically, the basing point is the same location as the manufacturing point, and the shipping charge is determined despite the actual location of the buyer or seller.

In other words, prices include transportation charges from the basing point, regardless of the location from which the actual shipment is made.

BREAKING DOWN 'Basing Point Pricing System'

Since inception, the basing point pricing system has encountered opposition due to its collusive, cartel nature. Once a given 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.

For example, the basing point is set at location Alpha because coal is produced there. Company X operates in Alpha and Company Y is located 100 miles west of Alpha. If a customer is located 50 miles east of Alpha, then the set price for coal under the basing point system is $1,000 plus a $300 transportation fee. Both companies must charge $1,300, but Company X only has to ship the coal 50 miles, whereas Company Y has to ship 150 miles.

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