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Spatial Pricing Decisions

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.

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Spatial Pricing Decisions

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  1. Spatial Pricing Decisions Chapter 6 1

  2. 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 2

  3. Price discrimination • Firm sells product at different prices to different people when cost differences do not exist. • Student discounts • Senior discounts 3

  4. 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 4

  5. To price discriminate • Firm must have some control over price • Different markets must have different price elasticities • Customers of each market must be separable and easily identifiable • Administrative costs of charging different prices must be less than potential gain • Arbitrage cannot be possible or profitable 5

  6. Figure 6-1 6

  7. 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) 7

  8. 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 8

  9. Perfect discriminatory spatial pricing vs. f.o.b. mill pricing 9

  10. 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. 10

  11. Uniform delivered pricing vs. f.o.b. mill pricing 11

  12. Zonal pricing • All customers in a given region pay the same price. • e.g., USPS uses 8 zones. 12

  13. Zonal pricing, spatial price discrimination and f.o.b. mill pricing 13

  14. 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. 14

  15. Basing-point pricing 15

  16. Welfare analysis • f.o.b. mill pricing is similar to perfect competition and provides the largest amount of consumer + producer surplus 16

  17. Producer and consumer surplus 17

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