Extending membership-based free shipping programmes to include third-party sellers can strengthen online marketplaces rather than weaken them, according to new research published in the INFORMS journal Information Systems Research. The study suggests that initiatives similar to Amazon’s “Buy with Prime” have the potential to increase marketplace commission revenue while easing shipping pressures, even when the logistics services themselves are not directly profitable.
The peer-reviewed findings indicate that when free-shipping benefits are broadened beyond in-house sellers to external merchants, overall marketplace profitability can improve. Although such moves are often assumed to divert sales away from internal sellers, the research shows they can instead reinforce core revenue streams and enhance marketplace efficiency.
The study, titled Unveiling the Strategic Impacts of Extending Membership-Based Free Shipping Programs Beyond the Online Marketplaces, was authored by Geng Sun of the University of Texas Rio Grande Valley, alongside Huseyin Cavusoglu and Srinivasan Raghunathan of the University of Texas at Dallas. The researchers focused on understanding how expanded free-shipping programmes reshape competitive behaviour across digital retail platforms.
“Marketplaces often believe that extending free-shipping benefits beyond their own platforms will inevitably cannibalise their core business,” Sun explained. “Our results show the opposite. Under many realistic conditions, these programmes reinforce rather than erode existing revenue streams.”
Cavusoglu added that expanding free shipping fundamentally alters the strategic interaction between internal sellers and outside merchants. What may initially be lost sales can generate new pathways for marketplace profitability as sellers adjust pricing and competitive strategies in response to the broader programme.
Using a game-theoretic model of online retail competition, the researchers found that both internal and external sellers can benefit from extended free shipping, provided delivery costs remain within certain limits. While member shoppers may face higher prices as market dynamics shift, non-members who always pay for shipping are consistently worse off. Overall, the study concludes that even when logistics services are not profitable on their own, extended free shipping programmes can still enhance the marketplace’s core business performance.
More information: Geng Sun et al, Unveiling the Strategic Impacts of Extending Membership-Based Free Shipping Programs Beyond the Online Marketplaces, Information Systems Research. DOI: 10.1287/isre.2024.1196
Journal information: Information Systems Research Provided by Institute for Operations Research and the Management Sciences