Can Free-Shipping Hurt Online Retailers? Evidence from Online Grocery Shopping

44 Pages Posted: 9 Oct 2014 Last revised: 8 May 2020

See all articles by Ricard Gil

Ricard Gil

Queen's University (Canada) - Smith School of Business

Evsen Korkmaz

Erasmus University Rotterdam (EUR) - Department of Technology and Operations Management

Ozge Sahin

Johns Hopkins University - Carey Business School

Date Written: January 28, 2020

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 (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.

Keywords: Metering, price discrimination, online grocery sales

JEL Classification: L11, L86, M20

Suggested Citation

Gil, Ricard and Korkmaz, Evsen and Sahin, Ozge, Can Free-Shipping Hurt Online Retailers? Evidence from Online Grocery Shopping (January 28, 2020). NET Institute Working Paper No. 14-10, Johns Hopkins Carey Business School Research Paper No. 20-04, Available at SSRN: https://ssrn.com/abstract=2506354 or http://dx.doi.org/10.2139/ssrn.2506354

Ricard Gil (Contact Author)

Queen's University (Canada) - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Evsen Korkmaz

Erasmus University Rotterdam (EUR) - Department of Technology and Operations Management ( email )

RSM Erasmus University
PO Box 1738
3000 DR Rotterdam
Netherlands

Ozge Sahin

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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