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Can free-shipping hurt online retailers?

Author

Listed:
  • Ricard Gil

    (Smith School of Business at Queen’s University)

  • Evsen Korkmaz

    (Data Scientist at Unilever)

  • Ozge Sahin

    (Johns Hopkins Carey Business School)

Abstract

In this paper, we investigate optimal pricing strategies for an online grocery retailer that derives its profits from delivery fees and grocery sales. We base our theoretical framework on the well-established work of Schmalensee (Bell Journal of Economics12(2), 445–466, 1981) in two-part pricing, while allowing for repeat purchase occasions. 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 an increase in the number of deliveries is associated with a greater-than-proportional increase in grocery sales, implying that preferences for deliveries and groceries are negatively correlated. Therefore, counter to the current popularity of free shipping, the observed strategy of discounting groceries and charging high delivery fees appears to be optimal in our empirical setting.

Suggested Citation

  • Ricard Gil & Evsen Korkmaz & Ozge Sahin, 2020. "Can free-shipping hurt online retailers?," Quantitative Marketing and Economics (QME), Springer, vol. 18(3), pages 305-342, September.
    • Handle: RePEc:kap:qmktec:v:18:y:2020:i:3:d:10.1007_s11129-020-09225-8
    DOI: 10.1007/s11129-020-09225-8
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    References listed on IDEAS

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    3. Ratchford, Brian & Soysal, Gonca & Zentner, Alejandro & Gauri, Dinesh K., 2022. "Online and offline retailing: What we know and directions for future research," Journal of Retailing, Elsevier, vol. 98(1), pages 152-177.
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    More about this item

    Keywords

    Metering; Price discrimination; Online grocery sales;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General

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