In the second essay, we investigate the problems related to designing a successful shipping-fee policy on the Internet. In this essay, we compare different shipping schedules in terms of how they affect shoppers’ purchase behavior. In addition, we investigate the relationship between price and the free-shipping threshold. We first build analytical models to derive closed-form solutions for the questions we want to address. Hypotheses are generated based on the analytical models. We then use Internet shopping data on various Web sites to test the hypotheses. Both marketing methods and data mining methods are utilized in the empirical testing. In the model, we consider 5 different shipping schedules. We formulate the cost that a rational shopper incurs under each shipping schedule, and derive the optimal purchase quantity for the shopper. By comparing the cost associated with each shipping schedule, we are able to draw conclusions about which shipping schedule a shopper will prefer. Furthermore, we investigate the relationship between price and the free-shipping threshold (the total amount a shopper needs to spend in a purchase transaction in order to get free shipping). Our solution suggests that stores with different prices can be equally competitive if they set the right free-shipping threshold level.
