Abstract
We study the delivery market for e-commerce products, with two technologies: home delivery and delivery to a relay point. Taste differences for these are represented by a Hotelling model. Operators choose the (costly) quality of their delivery service. We study a single operator who uses both technologies and a duopoly with two single-technology operators. The home delivery operator may or may not be regulated; the relay operator is not regulated. We study pricing policies and the impact of competition on welfare. We also show that quality regulation may have an adverse effect on welfare.
We thank all the participants for their comments and questions. We are particularly grateful to our discussant Alberto Pimento and to Tim Brennan for their insightful remarks and suggestions.
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Notes
- 1.
See Gabszewicz and Thisse 1992 for a survey of the extensive literature.
- 2.
The industrial economics literature has typically concentrated on sequential games, mainly because in the standard differentiation model there the simultaneous game typically has no pure strategy equilibrium.
- 3.
Imperfect competition in the e-commerce sector would in most cases result in a different pattern of pass-through. Depending on the type of competition there may be under- or even over-shifting of shipping costs to the final customer.
- 4.
Chapter 3 shows that contrarily to initial expectations, the development of the internet has not led to perfect competition in the relevant markets. Still, it is shown that even though markets are concentrated and dominated by a few firms competition intensity is so strong that profit margins are small. As far as our problem is concerned this yields for all practical purposes the same result as a perfectly competitive market. In particular, there continues to be full pass-through of shipping costs.
- 5.
We could have specified utilities as θ α u(x) with α < 0 to make marginal benefits of quality decreasing. However, this is simply a change of variables; the unit in which we measure quality is arbitrary and our formulation is just as general, even though it implies that all the convexity is put in the cost term.
- 6.
This is because the inverse demand function which is given by q = θu′(x) becomes steeper as theta increases.
- 7.
Even if we neglect price variations the property that ∂L 2/∂θ h > 0 and ∂L 2/∂θ r > 0 holds at the profit maximizing, does not necessarily imply that social optimum is achieved for higher levels of θ h and θ r .
- 8.
An Excel file with the detailed results is available from the author upon request.
References
Borsenberger, C., Cremer, H., De Donder, P., Joram, D., & Lécou, S. (2014). Pricing of delivery services in the e-commerce sector. In M. A. Crew & T. J. Brennan (Eds.), The role of the postal and delivery sector in a digital age (pp. 75–92). Cheltenham/Northampton: Edward Elgar.
Gabszewicz, J., & Thisse, J.-F. (1992). Location. In R. Aumann & S. Hart (Eds.), Handbook of game theory (Vol. I, pp. 281–304). Amsterdam: North-Holland (chapter 9).
Mussa, M., & Rosen, S. (1978). Monopoly and product quality. Journal of Economic Theory, 18, 301–317.
Shaked, A., & Sutton, J. (1982). Relaxing price competition through product differentiation. Review of Economics Studies, 49, 3–14.
Varian, H. (1992). Microeconomic theory. New York: Norton.
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Borsenberger, C., Cremer, H., De Donder, P., Joram, D. (2015). Quality and Pricing of Delivery Services in the E-commerce Sector. In: Crew, M., Brennan, T. (eds) Postal and Delivery Innovation in the Digital Economy. Topics in Regulatory Economics and Policy, vol 50. Springer, Cham. https://doi.org/10.1007/978-3-319-12874-0_7
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DOI: https://doi.org/10.1007/978-3-319-12874-0_7
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