Basing point pricing is a historical method for calculating the final cost of goods delivered to a buyer. This system standardized the delivered price regardless of the manufacturer’s actual location or the true cost of transportation. It became controversial because it often resulted in buyers paying for shipping that never occurred.
Defining Basing Point Pricing
Basing point pricing determines the final price a customer pays using two components: the price of the product at a specific, designated location and the freight charge from that location to the buyer. This designated location, the “basing point,” is often a major manufacturing center, even if the goods did not originate there. All competing sellers use the same basing point to calculate the freight component for any customer. This mechanism ensures every seller quotes an identical delivered price, promoting price uniformity.
How the System Worked
This pricing method created two distinct cost distortions for the buyer and seller. One distortion, known as “phantom freight,” occurred when the seller shipped the product from a plant closer to the customer than the designated basing point. For example, if the base price was \$100 and the freight from the basing point was \$20, the delivered price was \$120. If the actual freight from the seller’s nearby plant was only \$10, the seller pocketed the extra \$10 difference, representing payment for transportation that was never incurred.
Conversely, “freight absorption” occurred when the seller shipped the product from a plant farther away from the customer than the basing point. Using the same \$120 delivered price, if the actual freight from the distant plant was \$30, the seller would only net \$90 for the product itself. The seller absorbed the \$10 difference between the actual \$30 freight cost and the \$20 freight cost calculated from the basing point. This illustrates how the delivered price was disconnected from the true cost of shipping and the seller’s net revenue.
Historical Use and Impact
Basing point pricing gained prominence across several heavy industries during the late 19th and early 20th centuries. The most famous application was the “Pittsburgh Plus” system, employed by the steel industry, which designated Pittsburgh, Pennsylvania, as the sole basing point for steel prices nationwide. Even mills located hundreds of miles away calculated the freight component as if the steel had shipped from Pittsburgh. This standardized calculation eliminated price competition based on a manufacturer’s geographic advantage or lower transportation costs. The result was a rigid market where buyers were always quoted an identical final price by every supplier.
Economic Consequences and Criticisms
The economic effects of this pricing system led to significant resource misallocation and market inefficiency. The guaranteed identical delivered price removed the incentive for manufacturers to locate plants near customers or raw material sources to achieve lower shipping costs. Instead, some companies built facilities far from the basing point, relying on freight absorption to compete in distant markets.
This structure also resulted in systemic price discrimination, even though the final delivered price was uniform. Buyers closer to the actual shipping plant paid a higher net price (delivered price minus actual freight cost) due to phantom freight. Conversely, buyers located near the basing point and far from the actual shipping plant received a lower net price because the seller absorbed freight. The lack of true price competition meant that market forces could not efficiently guide location decisions or resource deployment.
The Legal Fight and Antitrust Rulings
The use of basing point pricing drew the attention of federal regulators because the system represented a clear restraint on trade. Legal challenges were mounted under U.S. antitrust laws, specifically the Federal Trade Commission Act and the Robinson-Patman Act, which prohibit unfair competition and certain forms of price discrimination. The courts recognized that the concerted, industry-wide adoption of this identical pricing formula was evidence of illegal collusion and price-fixing.
A ruling came in the 1945 case Corn Products Refining Co. v. FTC, where the Supreme Court ruled that the company’s single basing point system constituted illegal price discrimination under the Robinson-Patman Act. This decision established that the practice violated antitrust laws because the system resulted in unearned “phantom” freight charges, creating systematic price discriminations. The Supreme Court rejected the argument that the system should be considered legal simply due to its historical prevalence.
The practice was outlawed for entire industries three years later with the 1948 Supreme Court decision, Federal Trade Commission v. Cement Institute. The court found that the collective use of a multiple basing point system by the cement industry was an unfair method of competition and a form of illegal price conspiracy. These rulings established that any coordinated pricing system designed to eliminate price variance among competitors would be viewed as an unlawful restraint of trade. The legal action dismantled a pricing structure that had dominated major American industries for decades.
Is Basing Point Pricing Still Used?
The specific method of basing point pricing, particularly when used collusively to enforce price uniformity, is illegal under current U.S. antitrust law. While the system is banned, companies still utilize legal methods to incorporate transportation costs into their final prices. One alternative is Free On Board (F.O.B.) pricing, where the buyer assumes ownership and freight costs at the seller’s loading dock. This makes the final price dependent on the true location of shipment. Another legal system is uniform delivered pricing, often called single-zone pricing, where all buyers within a defined geographic area pay the same flat price that includes an average freight cost.