Essays on the Economics of Membership-Based Free Shipping Programs in Online Marketplaces




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The rapid growth of e-commerce and the importance of shipping in the context of online retailing have motivated online retailers to introduce the membership-based free shipping programs (MFS) programs in which retail platforms bear the shipping costs for purchases made by members that have paid an upfront fee. In spite of the popularity of such programs and the exemplary success of Amazon Prime, the mechanisms and implications of MFS have not been thoroughly investigated. In this dissertation, we study the economics of membershipbased free shipping programs in online marketplaces from three distinct perspectives and provide insights to better leverage such programs in the online retailing industry. In the first chapter, we examine the strategic implications of MFS. We find that the membership fee collected by a platform does not even cover the shipping cost. However, MFS can benefit the platform because of its positive impacts on price and demand. Consumers, on the other hand, are not necessarily better off, despite higher level of consumption. Moreover, MFS could hurt the society because it may overstimulate demand from low value transactions and thus incur social waste. Our results imply that MFS cannot be simply considered as a pure shipping cost transfer mechanism; online retailers who aim to benefit from it should take into consideration the strategic benefits of it. In the second chapter, we identify the strategic relationship between an online retailer’s consumer-side MFS adoption and its supplier-side business model shift from the agency model of selling, where a retailer allows a manufacturer to sell on the retailer site for a commission on the sale price, to the wholesale resale model, where the retailer buys from the manufacturer at a wholesale price and resells to consumers at a retail price. We find that such shift enhances the value of MFS to the retailer in the sense the retailer gains more from MFS and MFS is profitable to the retailer in a larger region of the parameter space under the agency model than the wholesale model. The retailer’s gain from MFS comes at the expense of consumers and the society under the wholesale model, but the consumers and the society can also benefit from MFS under the agency model. The key driver of these results is that, under the wholesale model, MFS increases the severity of the double-marginalization problem because of larger retailer’s marginal cost; however, under the agency model, MFS reduces the impact of marginalization at the manufacturer end because the manufacturer faces consumers with smaller purchasing cost on average. In the last chapter, we focus on MFS in the context of platform competition. We would like to understand how MFS serves as an innovative marketing tool that grants unique competitive advantages and how competition in turn influences the adoption of MFS. By analyzing online retailers’ MFS decisions in a competitive environment, we show that low shipping cost generally encourages the adoption of MFS that could benefit the adopter in terms of price, demand, and market share. Online retailers, however, are not necessarily better off with MFS. Particularly when shipping cost is attractive to induce MFS adoption on both sides but not low enough to justify the profitability, online retailers fall into prisoner’s dilemma where they are forced to adopt MFS that ends up hurting them both. Moreover, our analysis suggests that MFS is more likely to appear in the presence of competition than in a monopoly scenario, which provides a reasonable explanation to firms’ growing interest toward and the striking popularity of MFS.



Electronic commerce, Teleshopping, Retail trade, Delivery of goods, Shipment of goods, Associations, institutions, etc. -- Membership


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