Extracting values from consumer returns: The role of return-freight insurance for competing e-sellers

In e-commerce, return-freight insurance (RI) has become a significant profit-enhancing tool for e-sellers, which is used to compensate consumers for their return-freight fees. E-sellers can buy RI to offer it to consumers (Strategy O) or allow consumers to buy it (Strategy N). This paper develops a duopoly model to investigate how this new practice (introducing RI) affects the pricing strategies and demand of two e-sellers with different qualities and their RI decisions (producing four scenarios: NN, NO, ON, OO). First, we confirm that the introduction of RI does not necessarily lead to market expansion. The increase in demand of the low-quality e-seller (E-seller L) hinges on its low RI premium, the competitor's high RI premium, and the high return-freight compensation. Counterintuitively, the high return-freight compensation may prevent consumers from buying from the high-quality e-seller (E-seller H) who offers RI. Second, in contrast to E-seller L, E-seller H is inclined to lower the selling price if RI is introduced. In an online platform with RI, offering RI will induce e-sellers to increase their selling prices. Third, e-sellers prefer to offer RI only if the RI premium is low, the probability of product fit is low, and the return-freight compensation is high. The RI premium is the most important, and the probability of product fit is more important than the return-freight compensation. An interesting result is that the e-seller's preference for offering RI is not affected by the competitor's RI decision. Therefore, the equilibrium scenario can be NN, NO, ON, or OO.