Competitive Delivered Pricing by Mail-Order and Internet Retailers

Mail-order and internet sellers must decide how customers pay shipping charges. Typically, these sellers choose between two pricing policies: either “uniform pricing,” where the firm delivers to any customer at a fixed delivery charge (that may be volume dependent), or “mill pricing,” where the firm bills the customer a distance-related shipping charge. This paper studies price competition between a mail-order (or internet) seller and local retailers, and the mail-order firm’s choice of pricing policy. The price policy choice is studied when retailers do not change price in reaction to the mail-order firm’s policy choice, and when they do. In the second case, a two-stage non-cooperative game is used and it is found that for low customer willingness to pay, mill pricing is favored but as willingness to pay rises, uniform pricing becomes more attractive. These results are generalized showing that larger markets, higher transportation rates, higher unit production cost, and greater competition between retailers all increase profit under mill pricing relative to uniform pricing (and vice versa). On the other hand, cost asymmetries that favor the mail-order firm will tend to induce uniform rather than mill pricing. Some empirical data on retail and mail-order sales that confirm these results are presented