Delivered Pricing, FOB Pricing, and Collusion in Spatial Markets

The article examines price discrimination and collusion in spatial markets. The problem is analyzed in the context of a repeated duopoly game. I conclude that the prevailing pricing systems depend on the structural elements of the market. Delivered pricing systems emerge in equilibrium in highly monopolistic and highly competitive industries, while FOB is used in intermediate market structures. Thefact driving this result is that delivered pricing policies allow spatial price discrimination that facilitates collusion, but at the same time they have a very competitive feature: they are the only pricing rules that could be sustained in a very competitive market structure. * In some markets, sellers have the ability to discriminate among consumers by making price vary according to some characteristic of the buyer. Here I analyze a particular type of price discrimination common in spatial markets where a consumer's location is observable. In this situation the choice variable for the firm is a price system that specifies a price per unit of product at each location: each firm must choose a function p(x), where x is the distance between the location of the consumer and the location of the firm. In practice, different industries use different types of pricing systems, p(x), and this suggests that the prevailing pricing system depends on the structural elements of the market. When the pricing policy is FOB,' consumers can pick up the product at the mill, paying the mill price p and incurring the transportation cost from the producer's to the consumer's location, i.e., p(x) = p + t(x), or the seller may deliver the good to the buyer's location, as long as it charges mill price plus transportation costs. Delivered pricing policies are pricing rules p(x) that are not based on consumers picking up the product at the mill; the firm delivers the product at the consumer's location. In a perfectly competitive world with a continuum of firms, an FOB pricing system would be expected: p(x) = c + t(x), where c is the marginal cost of production. In the case of a market with two firms located at the