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Optimal order lot sizing and pricing with free shipping |
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| Authors: | Guowei Hua Shouyang Wang |
| Institution: | a Department of Logistics Management, School of Economics and Management, Beijing Jiaotong University, Beijing 100044, PR China b Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing 100190, PR China c Department of Logistics and Maritime Studies, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong, PR China |
| Abstract: | Companies, especially those in e-business, are increasingly offering free shipping to buyers whose order sizes exceed the free shipping quantity. In this paper, given that the supplier offers free shipping, we determine the retailer’s optimal order lot size and the optimal retail price. We explicitly incorporate the supplier’s quantity discount, and transportation cost into the model. We analytically and numerically examine the impacts of free shipping, quantity discount and transportation cost on the retailer’s optimal lot sizing and pricing decisions. We find that free shipping can benefit the supplier, the retailer, and the end customers, and can effectively encourage the retailer to order more of the good, to the extent of ordering a few times of the optimal order lot size without free shipping. The order lot size will increase and the retail price will decrease if the supplier offers proper free shipping. |
| Keywords: | Inventory Logistics Free shipping Pricing Purchasing |
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