Will providing return-freight-insurances do more good than harm to dual-channel e-commerce retailers?

Today, e-commerce retailers commonly operate in a dual-channel mode. Return freight insurance (RFI) is an emerging measure to resolve online shopping disputes with product returns. If a consumer re-turns an insured product, the insurance company will compensate the consumer for the return-freight fee. In practice, we observe that some dual-channel e-commerce retailers offer RFI to consumers, while others do not. We build consumer-utility-based analytical models to study the retailer's optimal pricing decisions and values of RFI. In the basic models, the proportions of store-type consumers and online-type consumers are exogenously given; we examine three cases, namely Case N (RFIs are not provided), Case R (retailer purchases RFI for consumers), and Case C (consumers pay for RFI). Comparing these three cases, we uncover that the retailer who purchases RFI for consumers does not necessarily charge a higher price. We show that if the RFI premium is sufficiently (moderately) low, it is more beneficial for consumers (the retailer) to pay for the RFI. We analytically prove that (i) when the product's salvage value is polar-ized or the return freight cost is low, using RFI can help increase consumer surplus (CS), (ii) when the salvage value is sufficiently high, the social welfare (SW) with RFI is higher than the case without RFI. In the extended models, we explore the situation in which consumers can decide whether to purchase RFI as well as the channel to buy the products. In this case, we find that (i) the retailer should provide RFI only when the product's cost, salvage value, and return freight cost are all high, and (ii) offering RFI can increase CS but hurt SW. We also consider various extended models to prove the robustness of the research findings. (c) 2022 Elsevier B.V. All rights reserved.

Automated summary

Dual-channel e-commerce retailers commonly offer return freight insurance (RFI) to resolve disputes regarding product returns, but not all retailers provide it. By building consumer-utility-based analytical models, we find that retailers who purchase RFI for consumers do not necessarily charge higher prices. The study highlights the importance of the RFI premium and its impact on consumer surplus and social welfare.