تبعیض قیمت مبتنی بر کیفیت: شواهدی از گزینه های حمل رایگان خرده فروش های اینترنتی

This paper tests various implications of quality-based price discrimination theory in the context of internet book retailers’ shipping menus. Many internet retailers create quality variants of a homogeneous good by bundling it with several shipping options that differ by delivery time. This practice can allow retailers to extract further surplus from consumers through quality-based price discrimination. We find that the design of shipping menus offered by large retailers is consistent with main implications of quality-based price discrimination theory. Fringe sellers, however, do not appear to engage in price discrimination based on quality.

Shipping, handling, and delivery services are an integral part of catalog and internet retailing. With the growing volume of e-commerce, the management and pricing of shipping services have become crucial tasks for internet retailers. Recent research has focused on how retailers split total price of a good into a base price and a shipping fee, how they use shipping fees to raise customer acquisition and retention rates as well as purchase quantities, and how they choose free shipping thresholds.1 Much less attention has been paid, however, to how a retailer designs its menu of shipping options and the motivations behind offering a variety of shipping options simultaneously. Shipping menu design poses challenges for any internet retailer. Offering a single shipping option to all consumers may be cost-effective and easy to implement, but runs the risk of losing consumers who value faster delivery. Faster shipping options, such as two-day or overnight delivery, however, are available at much higher prices from shipping companies, and a retailer must have an infrastructure that allows faster handling and flow of goods to make them shipment-ready. Furthermore, to be able to offer these fast options at attractive fees, a retailer may need to serve a sufficiently large number of customers who value such options. Scale economies can help larger retailers provide these options at lower costs due to favorable terms they can obtain from shipping companies. Small and specialized retailers may choose to offer a more limited menu of shipping options, especially if their niche is a consumer segment with relatively homogeneous needs for delivery speed. One therefore expects to see differences across retailers in the breadth of their shipping menus. Internet retailers that can offer multiple shipping options face a mechanism design problem. They need to determine how many options to offer, the delivery times for these options, and the fees charged for them. This problem also presents an opportunity: a retailer can price-discriminate based on the delivery times specified in these options and extract more surplus from consumers compared to nondiscriminating pricing. In fact, a retailer can offer a menu of shipping options that induces a consumer with an unobserved willingness to pay for delivery time to self-select into an option designed specifically for that consumer. This paper investigates whether such strategic design of shipping menus prevails in the context of internet book retailing. The results indicate that only a subset of the firms in the market, mainly large and well-known retailers, offer broad menus the designs of which are consistent with the implications of the theory of quality-based price discrimination. Fringe firms offer narrower menus and do not appear to engage in such discrimination. A product is often marketed at different quality levels. One motivation behind this practice is the use of quality variants to price-discriminate among consumers with different but unobserved tastes for quality. The first systematic theoretical analysis of this practice is due to Mussa and Rosen (1978), who analyzed how a monopolist can induce consumers with unobserved heterogeneous tastes for quality to self-select from among the product-qualities it offers. The monopolist can extract greater surplus overall if it offers a socially suboptimal quality level for its low quality product to prevent consumers who have high willingness to pay for quality from settling for the low quality. The result is a quality range broader than required for efficiency, and markups that increase with quality.2 Some implications of the monopoly case extend to more general market structures, where firms have some degree of market power due to horizontal or vertical product differentiation.3 Despite the abundance of theoretical studies, empirical investigations of quality-based price discrimination are still scant. It is not easy to find good measures of quality by which products can be ranked unambiguously, especially when products possess many vertically differentiated attributes. In a notable study, Kwoka (1992) provides a formal test of quality-based price discrimination, using detailed price and cost data on four car models produced by Chrysler, a large U.S. automobile manufacturer. Assuming Chrysler has some market power due to brand loyalty, he finds that the firm offers socially sub-optimal qualities for all models in the product line except for the top quality model, which also has the highest markup. Although this is a well-conceived study, a small sample from only one firm in the market limits the generality of the conclusions. Furthermore, vehicle length, the measure of quality used in the study, may not be a very good proxy for the overall quality of an automobile, even within the same manufacturer. It is difficult to capture the notion of quality with a scalar for a product that has so many different attributes. This paper provides more comprehensive tests of quality-based price discrimination theory using data from internet book retailers’ shipping options. Our analysis addresses some of the difficulties in testing the theory. First, books are homogenous goods, and shipping options create an observable univariate quality dimension for otherwise identical books across retailers. This quality dimension can be measured by a retailer's reported average delivery time for a shipping option. Consumers regard delivery time as one of the most important features of a shipping option.4 Longer delivery time means worse shipping quality, and consumers generally care less about other features of a shipping option.5 Second, we are able to offer various tests based on theories’ implications on markups and the relationship between the fees and the qualities of shipping options. Because shipping services of internet retailers are provided by a small number of nationwide shipping companies, we can approximate the retailers’ cost of shipping by using business shipping rates of major delivery service providers. These approximations allow construction of markup estimates for shipping options. Because we cannot measure markups precisely, we also offer tests that do not rely on cost or markup estimates. Third, because the data on shipping options are readily available through the websites of a large number of internet book retailers, we are able to conduct an industry-wide study. We are able to explore how the ability to price-discriminate varies across different types of firms. This multifirm approach also helps us assess which types of retailers appear to engage in quality-based price discrimination. Fourth, a priori there are several reasons why a price-discriminating outcome may exist. While it may be difficult or unlawful for retailers to discriminate across consumers using the base price of a product, it may be much easier to do so based on the quality and fees of shipping options. Many empirical studies also indicate that internet retailers can exercise some amount of market power as a result of horizontal differentiation, brand name, or imperfect information due to search costs in internet markets.6 These considerations also apply to the well-documented price dispersion in internet markets.7 Given some amount of market power, some retailers may be able to more easily engage in quality-based price discrimination. We find evidence that quality-based price discrimination through shipping options prevails among larger and well-known internet book retailers. Certain theoretical studies suggest that when the market is sufficiently competitive, firms that offer several quality-variants of the same basic product adopt a constant markup on all quality variants, regardless of the cost of quality.8 This implication is rejected for the set of relatively large and well-known book retailers. These retailers offer three to four different shipping options with a wide range of quality choices. Their markups on shipping options also exhibit a statistically significant increase as shipping quality increases across options within a retailer. More importantly, a longer average delivery time for the slowest shipping option is associated with a higher shipping fee for faster shipping options. These findings are consistent with the main implications of quality-based price discrimination theory. The behavior of fringe retailers, however, is markedly different. These retailers offer only low quality shipping services and at most two shipping options, indicating that they do not slice the quality spectrum as finely as the larger retailers. Moreover, there is no statistically significant difference between the markups for the shipping options within a retailer for the retailers offering only two shipping options. The individual markups for the two shipping options are also both statistically indistinguishable from zero. The same finding applies to the markups of the fringe retailers with a single shipping option. Overall, only a subset of the retailers in the market appear to discriminate based on quality. There may be several reasons why fringe retailers offer narrower shipping menus, including retailer specialization on consumer segments that do not demand faster delivery, infrastructure limitations, or the costs associated with faster shipping options.9 The importance of internet retailers’ shipping menus in consumer decision making and shopping behavior is well-recognized. Shipping fees are considered among the important strategic tools of competition in internet retailing. In earlier work, Smith and Brynjolfsson (2001) found that consumers perceive and evaluate a product's base price and shipping fee differently, but did not investigate the choice of shipping menus. Hossain and Morgan (2006) provide experimental evidence that retailers’ division of total price into a base price and a shipping fee matters for bidders in eBay auctions. Dinlersoz and Li (2006) present evidence that internet retailers’ shipping fees and base prices are positively associated for the basic shipping options offered, and argue that imperfect consumer information about base prices and shipping fees can explain this positive correlation. Most studies so far include only a single shipping option – commonly referred to as the standard or ground option – in the analysis. However, in internet retailing, retailers typically offer a menu of shipping options. This paper explores the overall design of a shipping menu and how that design varies across different types of retailers. The literature so far has suggested that brand-name, reputation, and other retailer attributes result in considerable price dispersion across internet retailers.10 The question of whether such retailer differentiation also allows retailers to exploit differences across consumers in valuation of delivery services and engage in quality-based discrimination is the focus of this paper. The findings point to yet another channel e-retailers can extract further surplus from consumers. The rest of the paper is organized as follows. The next section discusses the testable implications of quality-based price discrimination theory to guide the empirical analysis. The ‘Data’ section describes the data. The ‘Empirical analysis’ section presents the empirical results. The ‘Discussion’ section discusses some potential alternative explanations. The last section offers concluding remarks.

The design of a menu of shipping options is a critical task for catalog and internet-based retailers. While much attention was paid in the literature to the relationship between internet retailers’ base prices and shipping fees for basic shipping options, a unified analysis of the design of shipping menus and its implications on retailers’ margins on shipping services have not been carried out. We considered theories’ implications on the distributions of the number, quality, and prices of shipping options within and across internet book retailers. One plausible hypothesis is that retailers charge constant markups over shipping options’ prices offered to them by third party shippers, perhaps just enough to cover handling costs or the cost of making items shipment ready, both incurred by the retailers themselves. Moreover, given the fact that several shipping options are available from shipping companies, one might also hypothesize that each retailer offers a variety of shipping options to satisfy the delivery needs of a heterogeneous consumer population. Neither of these hypotheses are supported by the data. The results are instead consistent with the view that large and well-known internet book retailers price discriminate among heterogeneous consumers who differ in their valuation of delivery time. For this set of retailers, the markup on a shipping option increases as the quality of the option increases within a retailer. Furthermore, within this set of retailers, those which offer slower delivery services for their slow shipping options also tend to charge higher fees for their fast shipping options. These results conform with the predictions of the theory of quality-based price discrimination. Small fringe retailers, on the other hand, do not appear to price discriminate. The findings also point to the importance of the structure of a retail market and the nature of retailer heterogeneity in assessing the implications of the theory of quality-based price discrimination. The number of shipping options and the quality and fee associated with each option depend on the position of the retailer in the market. The important implication of these findings for e-retailers and catalog retailers is that a retailer may indeed be able to extract further surplus from consumers by a strategic design of its shipping menu, above and beyond the effects of any strategic split of total price into a base price and shipping fee to alter consumer perceptions. However, the ability to do so depends on retailer characteristics. It may be profitable for retailers with large scale and scope to offer faster delivery services and a broader menu of shipping options, but not so for smaller, specialized retailers, which may not possess sufficient customer diversity, infrastructure, scale, and scope to afford such services.