Quality-based Price Discrimination: Evidence from Internet Retailers’ Shipping Options

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.

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► The designs of shipping menus by large and well-known internet book retailers consistent with broad implications of quality-based price discrimination theory.
► Large and well-known internet book retailers offer several shipping options, and markup associated with a shipping option increases as the delivery speed increases across options within a retailer.
► For large and well-known retailers, the lower the delivery speeds of slower shipping options, the higher the fees charged for faster shipping options.
► Fringe sellers offer only a small number of shipping options, and do not appear to engage in price discrimination based on quality.