FOB or Uniform Delivered Prices: Strategic Choice and Welfare Effects

Authors: Zhang, Mingxia; Sexton, Richard J.

Source: Journal of Industrial Economics, Volume 49, Number 2, June 2001 , pp. 197-221(25)

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Abstract:

In spatial markets firms typically use either FOB (mill) or uniform delivered (UD) pricing. What competitive factors motivate this choice and what are the welfare implications of the choice? We study these questions in a duopsony market, where farmers with unit elastic supply curves sell to processing firms. In results that differ considerably from prior work, we show that the equilibrium price policy depends upon the extent of competition in the market, with FOB pricing emerging under very competitive structures and UD pricing emerging under less competition. Mixed FOB-UD pricing may also emerge in equilibrium. In most cases welfare is higher under UD than FOB pricing.

Document Type: Original article

DOI: http://dx.doi.org/10.1111/1467-6451.00146

Affiliations: 1: Department of Agricultural and Resource Economics, University of California, Davis, CA, 95616, USA

Publication date: 2001-06-01