Shipping before order making: Optimal shipping quantity and pricing decisions under uncertain demand

The innovative logistics mode of shipping before order making has been used by several leading online retailers, due to its advantage on enhancing consumer delivered value and promoting customer demand. This paper investigates the optimal shipping quantity and product pricing strategy of the online retailer that uses this logistics mode under a stochastic demand, which is shipping-dependent and price-dependent. First, we build an extended newsvendor model and explore the closed-form solutions of the optimal shipping quantity and optimal product pricing strategies under certain assumptions on the demand function. Then, we compare the differences of the optimal strategies under different risk attitudes and analyze the impact of key parameters on the optimal strategies. At last, we extend the basic model by considering a general demand function. We conduct numerical experiments to verify the theoretical conclusions and analyze the effect of parameters on online retailers' optimal strategies and profits. The results show that the optimal shipping quantity first increases and then decreases with the increase of the price. This suggests that the online retailers should avoid blind price war under this logistics mode. The risk aversion degree slightly affects the optimal price, but significantly affects the optimal shipping quantity. Moreover, we find that parameters such as disposal cost and sensitivity of demand to shipping in advance significantly affect the optimal strategies of online retailers.