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Online retailers’ promotional pricing, free-shipping threshold, and inventory decisions: A simulation-based analysis

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  • Becerril-Arreola, Rafael
  • Leng, Mingming
  • Parlar, Mahmut

Abstract

We consider a two-stage decision problem, in which an online retailer first makes optimal decisions on his profit margin and free-shipping threshold, and then determines his inventory level. We start by developing the retailer’s expected profit function. Then, we use publicly-available statistics to find the best-fitting distribution for consumers’ purchase amounts and the best-fitting function for conversion rate (i.e., probability that an arriving visitor places an online order with the retailer). We show that: (i) a reduction of the profit margin does not significantly affect the standard deviation of consumers’ order sizes (purchase amounts) but increases the average order size; whereas, (ii) variations in a positive finite free-shipping threshold affect both the average value and the standard deviation of the order sizes. We then use Arena to simulate the online retailing system and OptQuest to find the retailer’s optimal decisions and maximum profit. Next, we perform a sensitivity analysis to examine the impact of the ratio of the unit holding and salvage cost to the unit shipping cost on the retailer’s optimal decisions. We also draw some important managerial insights.

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  • 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.
    • Handle: RePEc:eee:ejores:v:230:y:2013:i:2:p:272-283
    DOI: 10.1016/j.ejor.2013.04.006
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    4. Huang, Wen-Hsien & Shen, George C. & Liang, Che-Ling, 2019. "The effect of threshold free shipping policies on online shoppers' willingness to pay for shipping," Journal of Retailing and Consumer Services, Elsevier, vol. 48(C), pages 105-112.
    5. Kim, T.Y. & Dekker, R. & Heij, C., 2016. "The value of express delivery services for cross-border e-commerce in European Union markets," Econometric Institute Research Papers EI2016-12, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
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    9. Hu Wang & Di Li & Changbin Jiang & Yuxiang Zhang, 2023. "Exploring the Interactive Relationship between Retailers’ Free Shipping Decisions and Manufacturers’ Product Sales in Digital Retailing," Sustainability, MDPI, vol. 15(17), pages 1-19, August.
    10. Konur, Dinçer, 2021. "Keep your enemy close? Competitive online brands’ expansion with individual and shared showrooms," Omega, Elsevier, vol. 99(C).
    11. Wang, Xuerong & Leng, Mingming & Song, Jingpu & Luo, Chunlin & Hui, Sunyuen, 2019. "Managing a supply chain under the impact of customer reviews: A two-period game analysis," European Journal of Operational Research, Elsevier, vol. 277(2), pages 454-468.
    12. Zhen Fang & Yi-Chun (Chad) Ho & Xue (Jane) Tan & Yong Tan, 2021. "Show Me the Money: The Economic Impact of Membership-Based Free Shipping Programs on E-Tailers," Information Systems Research, INFORMS, vol. 32(4), pages 1115-1127, December.
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    15. Yanzhe (Murray) Lei & Stefanus Jasin & Amitabh Sinha, 2018. "Joint Dynamic Pricing and Order Fulfillment for E-commerce Retailers," Manufacturing & Service Operations Management, INFORMS, vol. 20(2), pages 269-284, May.
    16. 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.
    17. Li, Yiming & Li, Gang & Tayi, Giri Kumar & Cheng, T.C.E., 2021. "Return shipping insurance: Free versus for-a-fee?," International Journal of Production Economics, Elsevier, vol. 235(C).
    18. Cheng-An Tsai & Che-Wei Chang, 2022. "Development of a Partial Shipping Fees Pricing Model to Influence Consumers’ Purchase Intention under the COVID-19 Pandemic," Energies, MDPI, vol. 15(5), pages 1-16, March.
    19. 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.
    20. Shao, Xiao-Feng, 2017. "Free or calculated shipping: Impact of delivery cost on supply chains moving to online retailing," International Journal of Production Economics, Elsevier, vol. 191(C), pages 267-277.
    21. 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.
    22. Urvashi Tandon & Amit Mittal & Sridhar Manohar, 2021. "Examining the impact of intangible product features and e-commerce institutional mechanics on consumer trust and repurchase intention," Electronic Markets, Springer;IIM University of St. Gallen, vol. 31(4), pages 945-964, December.
    23. Abhishek Tandon & Aakash Aakash & Anu G. Aggarwal, 2020. "Impact of EWOM, website quality, and product satisfaction on customer satisfaction and repurchase intention: moderating role of shipping and handling," International Journal of System Assurance Engineering and Management, Springer;The Society for Reliability, Engineering Quality and Operations Management (SREQOM),India, and Division of Operation and Maintenance, Lulea University of Technology, Sweden, vol. 11(2), pages 349-356, July.
    24. 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.
    25. Huang, Wen-Hsien & Cheng, Yi-Ching, 2015. "Threshold free shipping policies for internet shoppers," Transportation Research Part A: Policy and Practice, Elsevier, vol. 82(C), pages 193-203.

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