Shipping Fees or Shipping Free? A Tale of Two Price Partitioning Strategies in Online Retailing

Production and Operations Management, Forthcoming

49 Pages Posted: 26 Dec 2010

See all articles by M. Gumus

M. Gumus

McGill University - Desautels Faculty of Management

Shanling li

McGill University

Wonseok Oh

McGill University - Desautels Faculty of Management

Saibal Ray

McGill University - Desautels Faculty of Management

Date Written: October 26, 2010

Abstract

In this paper, we study the price partitioning decisions of online retailers regarding shipping and handling (S&H) fees. Specifically, we analyze two partitioning formats used by retailers in this context. In the first scenario, retailers present customers with a price that is partitioned into a product price and a separate S&H surcharge (the PS strategy); in the second, customers are offered free shipping through a non-partitioned format where the product price already includes the shipping cost (the ZS strategy). We first develop a stylized game-theoretic model that captures the competitive dynamics between (and within) these two formats. Analysis of the model provides insights into how both firm and product level characteristics drive a retailer''s strategic choice regarding which partitioning format to adopt, and, hence, determines the equilibrium market structure in terms of proportion of ZS and PS retailers. Subsequently, we conduct empirical analyses, based on product and S&H prices data for two different product categories (digital cameras and printers) collected from online retailers, to validate all the results of our theoretical model. We establish that PS retailers charge lower product prices than ZS ones, but the total price (product S&H) charged is higher for the first group. The S&H charge for PS retailers can be significant - it is, on average, 5.4% (printers) and 3.0% (digital cameras) for our two product categories. Furthermore, retailers which are popular and or face risky cost environment are more likely to opt for the ZS strategy, while retailers whose portfolio mostly includes large or heavy products with high cost(S&H)-to-price ratios usually choose the PS strategy. Lastly, our empirical study also illustrates that the price adjustment behavior of retailers is affected by their shipping-fee policies - for example, ZS retailers change their product prices almost 1.5 times more frequently than PS ones.

Keywords: Retail, E-Commerce Pricing Strategy, Price Partitioning, Free Shipping, Shipping & Handling Costs

JEL Classification: D4''8 D4, D2''8 C72, M31

Suggested Citation

Gumus, Mehmet and li, Shanling and Oh, Wonseok and Ray, Saibal, Shipping Fees or Shipping Free? A Tale of Two Price Partitioning Strategies in Online Retailing (October 26, 2010). Production and Operations Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1731285

Mehmet Gumus (Contact Author)

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Shanling Li

McGill University ( email )

1001 Sherbrooke St. W
Montreal, Quebec H3A 1G5
Canada

Wonseok Oh

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Saibal Ray

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. (W)
Montreal, Quebec H3A 2M1
Canada

HOME PAGE: http://people.mcgill.ca/saibal.ray/

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