Free shipping in cross-border supply chains considering tax disparity and carrier’s pricing decisions

Abstract

Different from local sales, offering free shipping can be a strategic decision for the retailers/brands who sell products to overseas customers. This also significantly influences the carrier’s pricing decisions because of tax policies in different countries/regions. In this paper, we consider customers’ preference for free shipping and investigate two competing retailers’ free shipping decisions when they rely on a common carrier for cross-border logistics services. We focus on the impact of retail price competition and the carrier’s tax cost, which shows uniqueness in the shipping industry. We derive the supply chain parties’ optimal decisions by the general equilibrium theory and analyze their free shipping incentives based on game-theoretical models. We find that, if the carrier is non-resident, given one retailer’s free shipping, the other one would follow the step when the retail price competition is mild and the carrier faces small tax disparity. Interestingly, the carrier will benefit from the two retailers’ free shipping when the retail price competition is fierce and the tax disparity is small. If the carrier is resident and both retailers offer free shipping, we find that all supply chain parties will be beneficial, resulting in a win–win–win situation.