What is a Basing Point?
The basing point is the specific predetermined geographical location used in the basing point pricing system, in which the delivered price is the same for every destination, no matter where the product is produced or from what point it is shipped. Firms that use the system set the prices of their goods within a given market based on a base price plus a set rate for transportation charges, regardless of how far buyers are from their location.
- Basing point pricing is a system in which a buyer must pay the price for a product inclusive of freight costs, irrespective of the seller’s location.
- The basing point itself is usually where the manufacturing of a product or production of a commodity takes place.
- Basing point pricing enables selling firms to collude by simply agreeing on a base price.
- Basing point pricing lowers buying firms' ability to gain a competitive advantage by location or private transportation.
Understanding a Basing Point
The basing point is usually where the manufacturing of a product or production of a commodity occurs. The manufacturer then quotes the base price plus a set shipping cost from that location to all the buyers in that market, regardless of how far they are from the basing point.
Basing point pricing enables selling firms to collude by simply agreeing on a base price — and it lowers buying firms' ability to gain a competitive advantage by location or private transportation. Basing point pricing was once common practice in the United States, especially in the steel, cement, and automotive industries. Even after the passage of the Sherman Antitrust Act in 1890 that outlawed price fixing, companies widely used basing-point systems for another 60 years.
Unlawful Use of Basing Point Pricing
In 1948, the Supreme Court ruled in Federal Trade Commission v. The Cement Institute, et al., that the industry-wide basing point system used in the cement industry was unlawful and constituted an unfair method of competition to fix prices.
In 1924, the Federal Trade Commission ordered the United States Steel Corporation (X) and seven of its subsidiaries, which together produced about half of the total rolled steel production in the United States, to abandon the use of basing point pricing known as “Pittsburgh Plus.” Members of this price system sold their products at a base price and then added a freight charge.
Commentators argue that major steel producers in the North used the Pittsburgh Plus basing point pricing model to keep the South at an economic disadvantage in the steel industry.
Example of a Basing Point in Shipping
For example, let's assume Chicago is the basing point, then a shipment within Chicago will cost the base price, and a shipment outside Chicago will cost the base price plus the set shipping rate anywhere within that zone. Company X operates Chicago and Company Y is located 100 miles west of Chicago. If a customer is located 50 miles east of Chicago, then the set price a product under the basing point system will include the same transportation fee and both companies must charge the same, even though Company X only had to ship the product 50 miles, whereas Company Y had to ship it 150 miles.