Unveiling the Strategic Impacts of Extending Membership-Based Free Shipping Programs Beyond the Online Marketplaces

Online marketplaces, which facilitate transactions between consumers and sellers, have transformed the shopping experience across multiple product categories. Addressing the challenges related to shipping associated with online purchases of physical products, many marketplaces have introduced membership-based free shipping (MFS) programs and concomitantly invested heavily in their logistics and fulfillment capabilities. Seeking to monetize these capabilities, Amazon recently extended its program to encompass outside sellers, enabling member consumers to get free shipping even when purchasing from external sources. Although such an extension offers the potential for additional revenue in the form of “logistics as a service” (LaaS), it also pits marketplace sellers against external counterparts, potentially cannibalizing marketplace sales analogous to a manufacturer experiencing a decline in sales of existing products while extending its product line. Using a game-theoretic model, we examine the implications of the extended MFS program on the marketplace, sellers, and consumers, which have yet to be studied. Contrary to common belief, our findings suggest that the extended MFS program can be a means to bolster the profitability of the marketplace’s core business. It may increase the commission revenue and/or reduce the fulfillment costs related to member consumers’ purchases on the marketplace. Moreover, all stakeholders in the marketplace ecosystem—the marketplace, internal and external sellers, and member consumers—can stand to benefit from the extended MFS program, albeit at nonmember consumers’ expense. Furthermore, the marketplace may incur a loss from LaaS itself but still derive overall benefit from the extended MFS program. Our results challenge the view that the extended MFS program is an LaaS offering that serves as a new source of profit. Instead, our results demonstrate that the extended MFS program could represent a strategic approach with novel ramifications that are distinct from those of traditional product line extension.

History: Juan Feng, Senior Editor; Zhengrui Jiang, Associate Editor.

Supplemental Material: The online appendix is available at https://doi.org/10.1287/isre.2024.1196.