DEFINITION of 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 would set the prices of their goods within a given market based on a base price plus a set rate for transportation charges, regardless of just how far buyers were from their location.
BREAKING DOWN 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 which outlawed price fixing, basing-point systems were widely used 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, and that the industry had acted in concert to fix prices.
The basing point itself is usually where the manufacturing of a product or production of a commodity takes place, and the manufacturer will quote the base price plus a set shipping cost from that location, to all the buyers in that market, regardless just how far they are from the basing point.
Example of a Basing Point in Shipping
For example, if the basing point is Chicago, 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 has to ship it 150 miles.