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Optimal order lot sizing and pricing with free shipping

Author

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  • Hua, Guowei
  • Wang, Shouyang
  • Cheng, T.C.E.

Abstract

Companies, especially those in e-business, are increasingly offering free shipping to buyers whose order sizes exceed the free shipping quantity. In this paper, given that the supplier offers free shipping, we determine the retailer’s optimal order lot size and the optimal retail price. We explicitly incorporate the supplier’s quantity discount, and transportation cost into the model. We analytically and numerically examine the impacts of free shipping, quantity discount and transportation cost on the retailer’s optimal lot sizing and pricing decisions. We find that free shipping can benefit the supplier, the retailer, and the end customers, and can effectively encourage the retailer to order more of the good, to the extent of ordering a few times of the optimal order lot size without free shipping. The order lot size will increase and the retail price will decrease if the supplier offers proper free shipping.

Suggested Citation

  • Hua, Guowei & Wang, Shouyang & Cheng, T.C.E., 2012. "Optimal order lot sizing and pricing with free shipping," European Journal of Operational Research, Elsevier, vol. 218(2), pages 435-441.
    • Handle: RePEc:eee:ejores:v:218:y:2012:i:2:p:435-441
    DOI: 10.1016/j.ejor.2011.11.024
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    References listed on IDEAS

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    Cited by:

    1. Wang, Chuanxu & Huang, Rongbing & Wei, Qianli, 2015. "Integrated pricing and lot-sizing decision in a two-echelon supply chain with a finite production rate," International Journal of Production Economics, Elsevier, vol. 161(C), pages 44-53.
    2. Libin Guo & Yuxiao Shang, 2023. "Decision-Making of Cross-Border E-Commerce Platform Supply Chains Considering Information Sharing and Free Shipping," Sustainability, MDPI, vol. 15(4), pages 1-22, February.
    3. Choi, Tsan-Ming & Guo, Shu & Liu, Na & Shi, Xiutian, 2019. "Values of food leftover sharing platforms in the sharing economy," International Journal of Production Economics, Elsevier, vol. 213(C), pages 23-31.
    4. Mou, Shandong & Robb, David J. & DeHoratius, Nicole, 2018. "Retail store operations: Literature review and research directions," European Journal of Operational Research, Elsevier, vol. 265(2), pages 399-422.
    5. Becerril-Arreola, Rafael & Leng, Mingming & Parlar, Mahmut, 2013. "Online retailers’ promotional pricing, free-shipping threshold, and inventory decisions: A simulation-based analysis," European Journal of Operational Research, Elsevier, vol. 230(2), pages 272-283.
    6. Qing-chun Meng & Xiao-le Wan & Xiao-xia Rong, 2015. "A Robust Ordering Strategy for Retailers Facing a Free Shipping Option," PLOS ONE, Public Library of Science, vol. 10(5), pages 1-14, May.
    7. Adeinat, Hamza & Ventura, José A., 2015. "Determining the retailer's replenishment policy considering multiple capacitated suppliers and price-sensitive demand," European Journal of Operational Research, Elsevier, vol. 247(1), pages 83-92.
    8. T. M. Rofin & Biswajit Mahanty, 2021. "Fulfillment mode selection for Indian online sellers under free and flat rate shipping policies," Electronic Commerce Research, Springer, vol. 21(2), pages 263-296, June.
    9. Xiaxia Ma & Wenliang Bian & Xiqing Yang & Shengnan Niu & Yongming Cai & Jie Guan & Wenbin Wang, 2022. "Online Retailer’s Contingent Free-Shipping Decisions under Large-Scale Promotions Considering Delayed Delivery," Sustainability, MDPI, vol. 14(17), pages 1-22, August.
    10. Ata Allah Taleizadeh & Mahsa Noori-daryan & Kannan Govindan, 2016. "Pricing and ordering decisions of two competing supply chains with different composite policies: a Stackelberg game-theoretic approach," International Journal of Production Research, Taylor & Francis Journals, vol. 54(9), pages 2807-2836, May.
    11. Ata Allah Taleizadeh & Mahsa Noori-daryan, 2016. "Pricing, inventory and production policies in a supply chain of pharmacological products with rework process: a game theoretic approach," Operational Research, Springer, vol. 16(1), pages 89-115, April.
    12. Wu, Xiang & (Yale) Gong, Yeming & Xu, Haoxuan & Chu, Chengbin & Zhang, Jinlong, 2017. "Dynamic lot-sizing models with pricing for new products," European Journal of Operational Research, Elsevier, vol. 260(1), pages 81-92.

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