Optimal shipping policy in retail competition and its effect on customers

Abstract

Abstract Purpose We examine a key question that online retailers are facing: In which case should they offer free shipping policy instead of calculated shipping policy? Design/methodology The problem is formulated as a Stackelberg game where two competing retailers purchase from a single supplier. Furthermore, we use numerical simulation to analyse the consumer and social welfare with different shipping policies. Novelty The main contribution of this work is that the positive and negative effects of different shipping policies are considered into a customer’s utility function, where the customer is loss averse. Findings (a) The free shipping policy is optimal for low-priced retailers and the calculated shipping policy is optimal for high-priced retailers. (b) The equilibrium shipping strategies are Pareto-optimal for all players in the supply chain. (c) In equilibrium, customers cannot achieve the highest consumer welfare, but the society can reach the highest social welfare. Implications When deciding which shipping policy to adopt, managers should consider the different sensitivities of customers to the shipping fee when buying high-priced products and low-priced products. Moreover, it is beneficial for the entire supply chain to have the retailers who are in direct contact with customers to determine the shipping strategies.