Customer differentiation with shipping as an ancillary service? free service, prioritization, and strategic delay

A service provider/retailer offers ancillary service (e.g., shipping by an online retailer) to two types of customers, impatient and patient, who may be heterogeneous both in their delay sensitivities and service valuations. She can use prioritization and/or strategic delay to differentiate them by...

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Main Author: Sainathan, Arvind
Other Authors: Nanyang Business School
Format: Article
Language:English
Published: 2019
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Online Access:https://hdl.handle.net/10356/106422
http://hdl.handle.net/10220/50041
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Institution: Nanyang Technological University
Language: English
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spelling sg-ntu-dr.10356-1064222023-05-19T06:44:42Z Customer differentiation with shipping as an ancillary service? free service, prioritization, and strategic delay Sainathan, Arvind Nanyang Business School Business::Marketing E-Commerce Free-Shipping A service provider/retailer offers ancillary service (e.g., shipping by an online retailer) to two types of customers, impatient and patient, who may be heterogeneous both in their delay sensitivities and service valuations. She can use prioritization and/or strategic delay to differentiate them by offering two service classes and charging different prices, potentially resulting in a split in which a single customer type selects both the classes. Her objective is to minimize cost while satisfying individual rationality and incentive compatibility conditions. We characterize the optimal solutions under both exogenous and endogenous capacities. We examine the conditions under which the following strategically important features of service delivery are optimal, and relate them to practical scenarios: (i) free service, (ii) single/differentiated service, (iii) split of customers, and (iv) strategic delay. We find that the presence of these features depends on (i) whether the retailer has limited or sufficient capacity and (ii) whether she sells fashion goods or staple products. A typical explanation for offering free service is that it increases demand from customers. We make an operational case for it by showing that even if demand does not change, free service is still optimal under some scenarios. Accepted version 2019-09-30T05:14:18Z 2019-12-06T22:11:21Z 2019-09-30T05:14:18Z 2019-12-06T22:11:21Z 2017 Journal Article Sainathan, A. (2018). Customer differentiation with shipping as an ancillary service? free service, prioritization, and strategic delay. Decision Sciences, 49(4), 690-727. doi:10.1111/deci.12285 0011-7315 https://hdl.handle.net/10356/106422 http://hdl.handle.net/10220/50041 10.1111/deci.12285 en Decision Sciences © 2017 Decision Sciences Institute (Published by Wiley). This is the peer reviewed version of the following article: Sainathan, A. (2018). Customer differentiation with shipping as an ancillary service? free service, prioritization, and strategic delay. Decision Sciences, 49(4), 690-727. doi:10.1111/deci.12285, which has been published in final form at http://dx.doi.org/10.1111/deci.12285. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions. 41 p. application/pdf
institution Nanyang Technological University
building NTU Library
continent Asia
country Singapore
Singapore
content_provider NTU Library
collection DR-NTU
language English
topic Business::Marketing
E-Commerce
Free-Shipping
spellingShingle Business::Marketing
E-Commerce
Free-Shipping
Sainathan, Arvind
Customer differentiation with shipping as an ancillary service? free service, prioritization, and strategic delay
description A service provider/retailer offers ancillary service (e.g., shipping by an online retailer) to two types of customers, impatient and patient, who may be heterogeneous both in their delay sensitivities and service valuations. She can use prioritization and/or strategic delay to differentiate them by offering two service classes and charging different prices, potentially resulting in a split in which a single customer type selects both the classes. Her objective is to minimize cost while satisfying individual rationality and incentive compatibility conditions. We characterize the optimal solutions under both exogenous and endogenous capacities. We examine the conditions under which the following strategically important features of service delivery are optimal, and relate them to practical scenarios: (i) free service, (ii) single/differentiated service, (iii) split of customers, and (iv) strategic delay. We find that the presence of these features depends on (i) whether the retailer has limited or sufficient capacity and (ii) whether she sells fashion goods or staple products. A typical explanation for offering free service is that it increases demand from customers. We make an operational case for it by showing that even if demand does not change, free service is still optimal under some scenarios.
author2 Nanyang Business School
author_facet Nanyang Business School
Sainathan, Arvind
format Article
author Sainathan, Arvind
author_sort Sainathan, Arvind
title Customer differentiation with shipping as an ancillary service? free service, prioritization, and strategic delay
title_short Customer differentiation with shipping as an ancillary service? free service, prioritization, and strategic delay
title_full Customer differentiation with shipping as an ancillary service? free service, prioritization, and strategic delay
title_fullStr Customer differentiation with shipping as an ancillary service? free service, prioritization, and strategic delay
title_full_unstemmed Customer differentiation with shipping as an ancillary service? free service, prioritization, and strategic delay
title_sort customer differentiation with shipping as an ancillary service? free service, prioritization, and strategic delay
publishDate 2019
url https://hdl.handle.net/10356/106422
http://hdl.handle.net/10220/50041
_version_ 1770565861093933056