Retailers’ Use of Shipping Cost Strategies: Free Shipping or Partitioned Prices?

Tanja Frischmann, Oliver Hinz, and Bernd Skiera
International Journal of Electronic Commerce,
Volume 16, Number 3, Spring 2012, pp. 65-87.

Abstract: The Internet has radically reduced the cost of collecting and distributing information. Consequently, researchers initially predicted that the resulting price transparency would drive prices toward a single market price. However, this has largely not happened, partly because retailers use shipping costs to make prices less comparable. Using data on 517,048 offers of 895 retailers from a leading European price comparison site, we show that retailers pursue two different shipping cost strategies. Both strategies lead to higher gross product prices, which are the sum of net product price and shipping costs and thus try to capture consumer surplus. These strategies are conflicting, however, and target different consumer segments: Some retailers charge high shipping costs and thereby try to exploit consumers’ biased perceptions of partitioned prices, while other retailers offer “free shipping” to attract consumers and exploit their so-called zero-risk bias. Consumers realize the lowest gross product prices by ordering at retailers that charge moderate shipping costs.

Key Words and Phrases: Electronic commerce, e-tail, price comparison, pricing, shipping costs.