Spatial Pricing Decisions

Chapter 6

Transport costs and distance

• Delivered price (mill price + transport costs): changes with distance

• Uniform delivered pricing: all consumers pay the same price regardless of location. – Post stamp – “free delivery”– Spatial price discrimination

Price discrimination

• Firm sells product at different prices to different people when cost differences do not exist.– Student discounts– Senior discounts

Spatial price discrimination

• Spatial price discrimination—customers do not pay the full (delivered) price to get their product.– Firms deliver it themselves or offer free

delivery

To price discriminate

1. Firm must have some control over price

2. Different markets must have different price elasticities

3. Customers of each market must be separable and easily identifiable

4. Administrative costs of charging different prices must be less than potential gain

5. Arbitrage cannot be possible or profitable

Figure 6-1

Spatial Price Discrimination

• Some amount of freight cost is absorbed by the firm

• Any spatial pricing other than f.o.b. mill pricing is discriminatory

• Lower prices for consumers with more elastic demand (those farther away)

Perfect discriminatory spatial pricing

• Each market is charged a different price based on distance from store and local competition

• Nearby customers subsidize those farther from the store

• May be linear price distance function, but that is not necessary.

• Expensive to administer

Perfect discriminatory spatial pricing vs. f.o.b. mill pricing

Uniform delivered pricing

• Firm provides the good to all consumers at the same price. “Free delivery”

• Nearby customers subsidize those farther from the store.

• Simple to administer

• Antitrust authorities tolerate uniform delivered pricing: it is supposedly “more fair” than discriminatory spatial pricing.

Uniform delivered pricing vs. f.o.b. mill pricing

Zonal pricing

• All customers in a given region pay the same price.

• e.g., USPS uses 8 zones.

Zonal pricing, spatial price discrimination and f.o.b. mill pricing

Basing point pricing

• All output is priced as if it were sold from Location A, regardless of the place of origin.

• In U.S.: Steel, plywood, milk (kind of)

• In Europe: Steel

• Result: The South took longer (and more money) to economically develop.

Basing-point pricing

Welfare analysis

• f.o.b. mill pricing is similar to perfect competition and provides the largest amount of consumer + producer surplus

Producer and consumer surplus