A consumer‐side innovation in online retailing is membership‐based free shipping (MFS) in which a retailer bears the shipping cost for purchases made by members that have paid an upfront membership fee. On the supplier side, the agency model of selling, where a retailer allows a third‐party manufacturer to sell his product on the site for a commission, has been gradually replacing the wholesale model, where the retailer buys from the manufacturer at a wholesale price and resells to consumers at a retail price. We show that the shift to the agency model enhances the value of the MFS program to the retailer in the sense the retailer gains more from the MFS program and MFS is profitable to the retailer in a larger region of the parameter space under the agency model than the wholesale model. The retailer's gain from MFS comes at the expense of consumers and the society under the wholesale model, but the consumers and the society can also benefit from MFS under the agency model. The key driver of these results is that, under the wholesale model, the MFS program increases the severity of the double‐marginalization problem because the MFS program increases the retailer's marginal cost; however, under the agency model, the MFS program reduces the impact of marginalization at the manufacturer end because the manufacturer faces consumers with lower purchasing cost on average. Thus, the MFS program hurts channel coordination in the wholesale model but helps it under the agency model.

Product shipping is an indispensable but costly operation in online retailing. Although several initiatives are underway to reduce the shipping cost, an important innovation is the membership-based free shipping (MFS) program, in which a retail platform that allows third-party sellers to sell their products for a commission bears the shipping costs for purchases made by members who have paid an up-front fee. We identify several strategic impacts of MFS programs that are the key drivers to their success from the platform’s or other stakeholders’ perspectives. For example, we find that the membership fee collected by the platform does not cover its shipping cost, which suggests the MFS program benefits members and hurts the platform if the program is evaluated based on direct operational considerations only. However, we also show that the MFS program actually benefits the platform and hurts consumers when the shipping cost is less than a threshold. Moreover, the platform’s benefit from the MFS program follows an inverted U shape with respect to the shipping cost, suggesting that the program enjoys the greatest benefit for products with a moderate shipping cost. Even though the MFS program enhances the overall consumer demand and consumption, it could hurt society because the MFS program stimulates demand from consumers who have a low consumption utility relative to the shipping cost. Our results demonstrate that the MFS program is not just a shipping cost-transfer mechanism; rather, it is a strategic initiative by online retail platforms to exploit the need for product shipping to their advantage. History: Ram Gopal, Senior Editor; Yuliang Yao, Associate Editor. Supplemental Material: The online supplement is available at https://doi.org/10.1287/isre.2022.0208 .