Free or calculated shipping: Impact of delivery cost on supply chains moving to online retailing

Abstract

Shipping policy is an important element in the operations strategy for retailers moving online. In this study, we provide a framework to respectively investigate the impact of shipping policies in the multi-retailer and exclusive-retailer supply chains. We first develop an oligopoly model of price competition under calculated shipping policy and a Cournot model of quantity competition under free shipping policy in the supply chain with multiple competitive retailers. Our main finding is that while online retailing may result in a lower price for customers and a higher supply quantity for the supplier, none of the retailers can benefit from online move under calculated shipping policy, and only retailers with relatively small local market size may be better off under the free shipping policy. Both the supplier and customers prefer free shipping policy. For the supply chain consisting of an exclusive retailer, we develop a geographical pricing model and a uniform pricing model. We find that shipping policies with or without charges make no difference under geographical pricing approach. Under uniform pricing approach, customers in regions with shipping costs lower than the weighted average shipping cost prefer calculated shipping policy, while those in regions with shipping costs higher than the weighted average shipping cost prefer free shipping policy.