Pricing and insurance strategy of online retailers for the price adjustment protection policy

In order to effectively respond to the deferred purchase of strategic consumers, online retailers have introduced the price adjustment protection (PAP) policy to improve consumers’ shopping experience. Under this policy, the online retailer promises to compensate all consumers for the full price difference, which will bring them certain losses. In this paper we construct two types of two-period decision-making models based on whether the online retailer provides the price adjustment protection insurance (PAPI) policy, and we study the online retailer’s pricing and insurance strategy using the Stackelberg game theory. Through our study, we obtain the online retailer’s optimal pricing strategy in PAP and PAPI respectively. Second, considering the insurer’s maximum profit, we derive the optimal insurance strategy of the online retailer in PAP and PAPI. Finally, when the insurer makes a profit from PAPI policy, we present conditions that affect the online retailer’s insurance strategy in terms of the premium, the proportion of consumers applying for compensation and the consumer’s inter-temporal discount factor. Our management implication is as follows: online retailers should choose a win-win insurance strategy with insurers according to the proportion of consumers applying for compensation and their strategic level.