Types of prices
There are many different pricing types collected by the ABS through the Survey of Producer Prices and this section will explore the different pricing types currently in scope of the Producer and International Trade Price Indexes.
A transaction price is the value placed on an item (agreed upon by seller and buyer) at the point of transaction. It must reflect the actual prices paid to or received from producers after taking into account all discounts applied to the transaction whether they be volume discounts, settlement discounts or competitive price cutting discounts which are likely to fluctuate with market conditions.
The Producer and International Trade Prices attempt to measure actual transaction prices for the exchange of products. The price includes the impact of all discounts, surcharges, rebates, etc. for a unique customer or unique class of customer. It is not always possible to obtain a transaction price net of all discounts and inclusive of all surcharges. Care is taken to secure a type of price with a movement which closely proxies actual transaction prices.
Contract pricing generally refers to a written sales instrument that specifies both the price and shipment terms. The contract may include arrangements for a single shipment or multiple shipments. The contract usually covers a period in excess of one quarter. Contracts are often unique in that not all the price-determining characteristics in one contract can be expected to be repeated exactly in any other contract. The challenge is to maintain a constant quality over time, especially when the contract expires and selection of a replacement product is necessary.
Contract terms may be unique to each agreement in terms of customised product features, negotiated price tied to the unique buyer/seller relationship, or quantity differences. In addition, contracts reflect supply and demand conditions at the time of entering into the contract. To maintain an accurate index where contract pricing is widespread, the ABS employs larger samples. This is to reflect the proper proportion of new contracts or renegotiated contracts being entered into in each pricing period.
Spot Market Prices
Spot market pricing (or simply spot price) may be defined as any short-term sales agreement. Generally, this refers to single-shipment orders with delivery expected in less than one month. Products sold on this basis are usually off-the-shelf and, therefore, are not subject to any customisation. These prices may be subject to discounting and directly reflect current market conditions. Spot market prices can be extremely volatile; in the case where this volatility is not experienced in actual transactions, the ABS adopts pricing methodologies that minimise this spot price volatility. For example, for crude petroleum oils, the ABS incorporate an average of daily prices into the price measurement for each period. Another solution the ABS adopts for homogeneous products that exhibit price volatility is to use average unit values.
Average Unit Values
Average unit values (or simply average prices) reflect multiple shipments of a given product within a consistently defined period, for which data are usually readily available. The advantage of average unit values is that they effectively increase the number of price observations used to calculate the index, thereby reducing sample variance. The reduction in variance is achieved because average unit values explicitly represent the entire population of transactions for a particular product, and so the concern when pricing a handful of single transactions does not apply. An average unit value does not take into account constant quality and is therefore used selectively.
Counterpart pricing is a term to reflect utilisation of a transaction price observed on a pricing basis that differs from the conceptual basis of the price index. For example, consider an input price index that measures the price of plumbing products purchased by builders for use in house construction. The conceptual basis for such a price index is to measure the purchasers’ price paid by the builder, inclusive of delivery charges. A counterpart price for this transaction would be the price received by the producer of the plumbing products; that is, the basic price. This basic price would differ from that paid by the builder in this case due to delivery costs. The counterpart pricing methodology is employed whenever a purchaser’s price is represented by a basic price, or vice versa.
Please note that the use of a counterpart pricing methodology has the implicit assumption that transport and distributive trade margins move proportionally with the basic price.
Model pricing is an approach adopted to measure products that are unique in nature, i.e. a product that is only manufactured once to the specification of a customer. The model pricing approach defines a notional product (the model) that is to be priced over time. The circumstances that dictate the use of model pricing mean that the products are themselves unique, and frequently the products provided are complex in nature.
Transfer prices are the prices adopted for bookkeeping purposes between affiliated enterprises under common management and may not correspond to prices that would be charged to independent parties. Affiliated enterprise may set the prices of transactions among themselves artificially high or low in order to affect an unspecified income payment or capital transfer.
Please refer below for issues relating to transfer pricing.