Pricing Policy Choice by Internet Retailers

Internet sellers must decide how customers pay shipping charges. Typically, these sellers choose between "uniform pricing," where the firm delivers to any customer at a fixed delivery charge, or "mill pricing," where the firm bills the customer a distance-related shipping charge. This paper studies price competition between an internet seller and local retailers, and the internet seller's choice of pricing policy. It is found that for low customer willingness to pay, mill pricing is favored but as willingness to pay rises, uniform pricing becomes more attractive. These results are generalized showing that larger markets, higher transportation rates, higher unit production cost, and greater competition between retailers all increase profit under mill pricing relative to uniform pricing (and vice versa). Cost asymmetries that favor the internet seller will tend to induce uniform rather than mill pricing. Some empirical data on retail and web retail sales that are consistent with these results are presented.