Money Maker or Money Loser? The Dilemma of Membership Free Shipping

Free shipping policy is widely used by e-tailers to improve customers’ online shopping experience. In this paper, we study two shipping policies that are intensively used in the current electronic market: membership free shipping (MFS) and contingent free shipping (CFS). In MFS, consumers pay a membership fee upfront and enjoy unlimited, free expedited shipping for a certain period, whereas in CFS, consumers are eligible for free standard shipping if the total transaction amount of an order exceeds a pre-determined threshold. We develop a game-theoretical model in which two competing e-tailers choose their shipping strategies in a sequential order to maximize their profits. Our main findings are threefold. First, when both e-tailers use the same shipping policy, MFS leads to a higher profit than CFS if faster shipping is employed. Second, while e-tailers have an incentive to adopt MFS, under some conditions they find themselves in the prisoner’s dilemma — both e-tailers end up choosing the less profitable CFS. Third, such a prisoner’s dilemma no longer exists when consumers’ valuation of expedited shipping offered by MFS is sufficiently higher than that of standard shipping attached to CFS. This study contributes to the literature on shipping pricing and provides useful implications for e-tailers.The Online Technical Appendix for this paper is available at the following URL: http://ssrn.com/abstract=2820355