Joint pricing and contingent free-shipping decisions in B2C transactions
Document Type
Journal article
Source Publication
Production and Operations Management
Publication Date
7-1-2010
Volume
19
Issue
4
First Page
390
Last Page
405
Publisher
Wiley-Blackwell Publishing, Inc.
Keywords
marketing-operations interface, profit margin, contingent free shipping, monopoly, duopoly
Abstract
We consider an online retailer's joint pricing and contingent free-shipping (CFS) decisions in both monopoly and duopoly structures, which is an important marketing-operations interface problem. We begin by investigating the impacts of a retailer's decisions on consumers' purchase behaviors, and show that the CFS strategy is useful to acquire the consumers with large order sizes. Then, we compute the probability of repeated purchases, and construct an expected profit function for an online retailer in the monopolistic setting. We find that the fixed shipping fees may have the largest impact on the retailer's profit among all shipping-related parameters, and the retailer can benefit more from homogeneous markets than from heterogeneous ones. Next, we consider the competition between two retailers in the duopoly structure, and analytically show that, if two retailers have identical fixed and variable shipping fees, then their equilibrium decisions are equal. In order to numerically find a Nash equilibrium for two retailers, we develop a simulation approach using Arena and OptQuest. Our simulation-based examples suggest that, as a result of the competition, the two retailers should decrease their profit margins but increase their CFS cutoff levels if they have the same fixed and also the same variable shipping fees.
DOI
10.1111/j.1937-5956.2009.01112.x
Print ISSN
10591478
E-ISSN
19375956
Publisher Statement
Copyright © 2009 Production and Operations Management Society
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Leng, M., & Becerril-Arreola, R. (2010). Joint pricing and contingent free-shipping decisions in B2C transactions. Production and Operations Management, 19(4), 390-405. doi: 10.1111/j.1937-5956.2009.01112.x