Uniform Spatial Pricing

Abstract

Uniform spatial pricing is a pricing policy by which a firm delivers its product to any customer at a fixed price, independent of the customer’s location. For example, it is the method often, but not always used by mail-order and internet firms. Less well-recognized is that uniform pricing is the standard pricing method for processed food and consumer goods manufacturers for sales to supermarkets and wholesalers. This paper contributes to the literature by extending the seminal work of Smithies (1941) that explained the profit maximizing choice between uniform and mill pricing by the convexity or concavity of the consumers demand curve. To date, this result stands as the primary economic explanation of choice between these pricing policies, and I extend it in two ways. The first generalizes results for the case where customers’ demand functions are not identical. I show that profit under uniform pricing exceeds that of mill pricing when demand price elasticity and transportation cost are positively correlated. The second result applies to firms with many shipping facilities. I show that Smithies’ results hold only if the firm sets mill prices from all facilities. I present necessary and sufficient conditions for a firm to maximize mill pricing profit by pricing from all shipping facilities for the linear demand case, and sufficient conditions for the non-linear case. When mill pricing from a subset, Smithies’ results are invalid and result in increased preference for mill pricing over uniform.

Keywords: Spatial, Competition, Pricing, Transportation

JEL Classification: D4, R10, M31