Shipping Fees and Product Assortment in Online Retail

Shipping fees are an important aspect of online retail for both consumers and sellers. A common fee structure is contingent free shipping, in which consumers are granted free shipping for basket sizes above a minimum value and are charged a flat fee for orders below this threshold. We seek to characterize how contingent free shipping influences purchase outcomes in a multi-category shopping environment. We build a demand model in which consumers choose how to allocate their spending over different product categories to maximize their direct utility under contingent free shipping. We estimate model parameters using transaction data from a pure online fashion retailer. We find that, relative to offering free shipping, offering contingent free shipping increases basket sizes by encouraging consumers to meet the minimum order threshold. Consumers incur search costs to meet this threshold exactly; sellers may benefit from maintaining high search costs to encourage overshooting. Moreover, we find that contingent free shipping shifts demand to more popular products and that the effects of category-level price changes on profits depends on the active shipping policy. Our findings demonstrate the importance of jointly determining product assortment attributes and shipping fee policies.