The Impact Of Free In Partitioned-Price Markets

Abstract

Using field data gathered from eBay's online marketplace, this dissertation analyzes the impact of free shipping in a market where the total price of an item is composed of two separate partitions. In this case, the act of remotely purchasing an item online requires some sort of delivery, and thereby creates an additional choice variable for firms: the shipping charge. Moreover, this choice variable need not have anything to do with the actual shipping cost facing a firm. Of course, according to the standard economic model, consumers should seamlessly integrate the shipping charge so that only the total price is relevant for demand-a consumer comparing next-day delivery of: (i) a brand-new 32GB iPad for $499.99 + $20.00 shipping; and (ii) a brand-new 32GB iPad for $519.99 + Free Shipping should be indifferent between the two options, since the sum of the individual price components is the same for both. Evidence from both the economics and psychology literature, however, suggests otherwise. In Chapter 1, I investigate the impact of free shipping using a large eBay dataset on iPad sales. I find evidence that free shipping leads to both significantly increased bidder valuations and higher probability of sale. I also uncover new results for positively-priced shipping, where a seller's choice of shipping charge has a nonlinear impact on: (i) revenue (conditional on sale); (ii) likelihood of sale; and (iii) unconditional expected revenue. In Chapter 2, I investigate the impact of free shipping using two additional eBay datasets. In replicating each component of the main analysis, I confirm the general robustness of the empirical results in Chapter 1. When comparing estimates across the different items, I also find that the impact of free shipping varies by product value. Finally, in Chapter 3 I develop a formal model in which several of the key empirical results are captured in a simplified, partitioned-price auction setting. In particular, I show that an equilibrium exists in which the optimal pricing strategy includes simultaneous offers of both free and non-free shipping, even when the (expected) profit per unit is larger for the free shipping item, due to the added transaction utility experienced by consumers.