Spatial pricing models with lumpy transportation costs: The case for travel cost subsidization

While many pricing possibilities have been studied in economic literature, almost all models dealing with spatial pricing assume that a separate transportation cost is paid for each unit purchased. This paper reanalyzes the most common spatial pricing options under the assumption that the transportation cost does not increase as the consumer buys additional units of a product, consistent with shopping trips, vacations, and other common activities. We derive optimal pricing policies and compare profitability and efficiency measures for several pricing strategies when transportation costs are lump sum, and suggest a new, remarkably efficient rule involving subsidizing travel costs.