Distance-Based Fee Design of Rapid Delivery

70 Pages Posted: 18 Jul 2023

See all articles by Manlu Chen

Manlu Chen

Renmin University of China - School of Business

Mingliu Chen

University of Texas at Dallas - Naveen Jindal School of Management

Ming Hu

University of Toronto - Rotman School of Management

Jianfu Wang

City University of Hong Kong

Date Written: June 19, 2024

Abstract

We examine the evolving landscape of the rapid delivery service industry, focusing on the strategic variations in pricing structures and service offerings as firms expand their operations from urban to suburban areas. Utilizing a stylized queueing model, we analyze the effects of a two-part delivery price-which includes a base fee and a distance-dependent fee-alongside the availability of a self-pickup option. We evaluate the implications of these strategies for various stakeholders across various customer-density environments. In urban centers, our findings indicate that vendors target nearby customers, instituting a relatively low base fee and a positive per-unit distance fee. This strategy attracts low-valuation, nearby customers while deterring distant orders, which optimizes courier capacity for proximate deliveries. In contrast, vendors operating in suburban settings aim to attract remote, high-valuation customers by introducing a high base fee to discourage low-valuation orders and a negative per-unit distance fee to subsidize delivery costs for distant, high-valuation orders-a practice less favorable to customer welfare and social welfare compared to flat fee pricing. We further investigate the potential profitability of self-pickup as an alternative to delivery services. In densely populated urban areas, self-pickup proves more lucrative, leading vendors to incentivize this option through discounts. Conversely, vendors may impose additional fees on self-pickup in suburban regions with lower population densities to favor delivery services. The self-pickup option encourages nearby customers to collect their orders, freeing up delivery capacity for distant customers who tolerate longer delays, which allows vendors to reduce the base fee accordingly. Our analysis concludes that, despite the varying profitability across demographic regions, the provision of a self-pickup option consistently benefits vendor profits, customer welfare, and social welfare. These results are driven by the interaction between location-based price discrimination on the demand side and delivery capacity "sharing" on the supply side. This research underscores the critical role demographic characteristics play in the strategic deployment of rapid delivery and self-pickup services, with critical implications for the operational and pricing strategies of firms within the industry.

Keywords: Rapid Delivery, Queueing Economics, Sharing Economy, Omni-Channel Operations

Suggested Citation

Chen, Manlu and Chen, Mingliu and Hu, Ming and Wang, Jianfu, Distance-Based Fee Design of Rapid Delivery (June 19, 2024). Available at SSRN: https://ssrn.com/abstract=4504691

Manlu Chen (Contact Author)

Renmin University of China - School of Business ( email )

Beijing
China

Mingliu Chen

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Ming Hu

University of Toronto - Rotman School of Management ( email )

105 St. George st
Toronto, ON M5S 3E6
Canada
416-946-5207 (Phone)

HOME PAGE: http://ming.hu

Jianfu Wang

City University of Hong Kong ( email )

Kowloon
Hong Kong
Hong Kong

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