If these charges make a parallel contribution to
profitability, why, then, do retailers partition them into
a product price and an S&H surcharge? We suggest that
retailers recognize that customers exhibit different levels
of sensitivity towards the price of a product and its S&H fee,
as observed by Smith and Brynjolfsson (2001). Thus,
retailers partition their prices to better segment their
markets and to realize greater opportunities to increase
demand, which, in turn, make it easier for them to obtain
margins in their transactions with customers from both
their product and S&H charges (Morowitz et al., 1998).
Given the parallel contribution from product margins and
S&H margins to a firm’s overall profitability in Internet
retailer–customer transactions and our expectation that a
positive relationship exists between PDS performance
promises and margins in those transactions, we propose
the following: