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Membership Free Shipping Programs: Effect on Competition and Optimality of Member Fees

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Title: Membership Free Shipping Programs: Effect on Competition and Optimality of Member Fees
Authors: Wen, Zhong
Lin, Lihui
Keywords: Competition
Game theory
Membership free shipping
Issue Date: 04 Jan 2017
Abstract: Fee-based membership free shipping is an important shipping fee schedule in E-Commerce. This paper studies how the membership free shipping (MFS) program affects firm competition and how to set the membership fee optimally. We find MFS relaxes price competition. The firm that adopts MFS has a higher pricing band than the other firm. Both firms have positive profits, strictly better than when membership free shipping is not a choice. The MFS firm subsidizes subscribers, so the subscribers always have a lower average total cost (price plus shipping fee) per order. The MFS firm could still earn a higher profit than the other firm, although the MFS firm's profit excluding membership fee is lower than that of the other firm. The paper also characterizes how to set the optimal membership fee and shows that an intermediate percentage of subscribers is optimal for the firm that adopts the free shipping program.
Pages/Duration: 5 pages
ISBN: 978-0-9981331-0-2
DOI: 10.24251/HICSS.2017.475
Rights: Attribution-NonCommercial-NoDerivatives 4.0 International
Appears in Collections:Electronic Marketing Minitrack

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