Optimal Pricing of Access and Secondary Goods with Repeat Purchases: Evidence from Online Grocery Shopping and Delivery Fees

In this paper we investigate optimal pricing strategies for an online grocery retailer who derives its profits from delivery fees and grocery sales. We base our theoretical framework upon the well-established work of Schmalensee (1981) in two-part pricing, while allowing for repeat purchase occasions as in Phillips and Battalio (1983). We derive testable implications that we take to data using a unique dataset detailing transaction information from an online grocery retailer in a Western European country. We find that the number of transactions and the average size of grocery baskets purchased are positively correlated. We also observe two customer groups in our data that differ in their willingness to pay. This observation together with robust evidence that price-sensitive customers buy larger baskets are consistent with an optimal pricing strategy that offers discounts for B2B customers and charges higher prices to households for grocery delivery. We conclude that firms may increase profits by implementing alternative and simpler pricing strategies that combine second and third degree price discrimination schemes.