Basing Point Pricing: Competition Versus Collusion

We consider the implications of game-theoretic models for the competitive or collusive nature of basing point pricing (BPP). In one-shot games, equilibrium price schedules do not generally conform to BPP with unrestricted price competition. Nevertheless BPP can emerge in dynamic contexts. Define modified FOB price policy as using FOB in one's natural market and matching the rival's delivered price whenever profitable. A configuration where both firms do this is a subgame perfect equilibrium of a two-stage game where firms choose first price policies and then compete in the marketplace. Further, with repeated competition BPP can be used as punishment device.