Spatial Pricing Decisions
This chapter compares free on board mill pricing to some discriminatory pricing strategies where the firm pays a portion of the cost of transporting the product. It provides some examples of the impact of spatial economics on antitrust legislation and other topics within the industrial organization literature. Some spatial price discrimination practices are unlawful in the United States under antitrust laws, but they may be quite acceptable in other countries. Spatial price discrimination means that some amount of freight cost is absorbed by the firm. Zonal pricing is a compromise between uniform spatial pricing and discriminatory spatial pricing. Under a zonal pricing system, all customers in a given region pay the same price. The major problem with zonal pricing is determining how to prevent arbitrage among consumers. Under a uniform delivered pricing rule, consumers near the plant are worse off because they subsidize transportation costs for those at the edge of the market area.