1 Spatial Pricing Decisions Chapter 6

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

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

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

5 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

6 Figure 6-1

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)

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

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

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.

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

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

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

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.

15 Basing-point pricing

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

17 Producer and consumer surplus