Optimal Pricing of Access and Secondary Goods with Repeat Purchases: Evidence from Online Grocery Shopping and Delivery Fees

46 Pages Posted: 9 Oct 2014

See all articles by Ricard Gil

Ricard Gil

Queen's University (Canada) - Smith School of Business; Johns Hopkins University - Carey Business School

Evsen Korkmaz

Erasmus University Rotterdam (EUR) - Department of Technology and Operations Management

Ozge Sahin

Johns Hopkins University - Carey Business School

Date Written: September 30, 2014

Abstract

In this paper we investigate optimal pricing strategies for an online grocery retailer who derives its proits from delivery fees and grocery sales. We base our theoretical framework upon the well-established work of Schmalensee (1981) in two-part pricing, while allowing for repeat purchase occasions as in Phillips and Battalio (1983). We derive testable implications that we take to data using a unique dataset detailing transaction information from an online grocery retailer in a Western European country. We find that the number of transactions and the average size of grocery baskets purchased are positively correlated. We also observe two customer groups in our data that differ in their willingness to pay. This observation together with robust evidence that price-sensitive customers buy larger baskets are consistent with an optimal pricing strategy that offers discounts for B2B customers and charges higher prices to households for grocery delivery. We conclude that firms may increase profits by implementing alternative and simpler pricing strategies that combine second and third degree price discrimination schemes.

Keywords: Metering, price discrimination, online grocery sales

JEL Classification: L11, L86, M20

Suggested Citation

Gil, Ricard and Korkmaz, Evsen and Sahin, Ozge, Optimal Pricing of Access and Secondary Goods with Repeat Purchases: Evidence from Online Grocery Shopping and Delivery Fees (September 30, 2014). NET Institute Working Paper No. 14-10. Available at SSRN: https://ssrn.com/abstract=2506354 or http://dx.doi.org/10.2139/ssrn.2506354

Ricard Gil (Contact Author)

Queen's University (Canada) - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

HOME PAGE: http://carey.jhu.edu

Evsen Korkmaz

Erasmus University Rotterdam (EUR) - Department of Technology and Operations Management ( email )

RSM Erasmus University
PO Box 1738
3000 DR Rotterdam
Netherlands

Ozge Sahin

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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