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 on-time delivery probability but shipping charges are negatively associated with on-time delivery probability; (2) Internet retailers will increase base prices when they offer free shipping; and (3) Internet retailers' shipping price difference between the standard and expedited 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 on-time probability. Our findings suggest that Internet retailers, to maximize profits, can strategically determine base price and shipping prices, and they can also strategically pace menu pricing for different shipping options.