Pricing for Shipping Services of Online Retailers: Analytical and Empirical Approaches

We develop an analytical model and conduct subsequent empirical analyses using data collected from the online retailers of digital cameras and video games. We find that (1) Internet retailers' base prices are positively associated with shipping quality but shipping charges are negatively associated with shipping quality; (2) Internet retailers will increase base prices when they offer free shipping; and (3) Internet retailers' shipping price difference between the two shipping modes increases with the shipping time of standard shipping but decreases with the shipping time of expedited shipping and also the Internet retailer's shipping quality. Our findings suggest that Internet retailers, to maximize profitability, can strategically partition base price and shipping prices, and they can also strategically pace menu pricing for different shipping options.