Price Discrimination, Backhaul Problems, and Trade Costs: Theory and Evidence from E-commerce Delivery

Delivery costs are a major component of trade costs. This paper studies the pricing of delivery services and the associated welfare implications. We develop a theoretical model to analyze the optimal two-part pricing of delivery services when delivery firms must commit to the maximum capacity for a round trip due to the backhaul problem and face heterogeneous demands across different geographical regions. The model predicts that a reduction in a delivery firm’s shipping costs partially lowers the marginal delivery price, raises the fixed fees, and has asymmetric impacts on prices across the fronthaul and backhaul routes. Using newly collected data from the largest informatics platform for Chinese e-commerce delivery firms, we quantify the model and find that a universal 10% reduction in shipping costs leads the marginal price to drop by 2.35%, the fixed fee to increase by 0.82%, delivery firms’ profit to increase by 1.17%, and e-commerce sellers’ welfare to rise by 0.36%, on average, with sellers in eastern and coastal cities gaining more than those in western and hinterland cities.