The Impact of Return Shipping Insurance on a Retailer Based on Restricting Rights

Abstract

In e-commerce, retailers often use return shipping insurance (RSI) to solve consumer returns, leading to a high return rate. To reduce this negative effect, we consider restricting rights to restrict consumers from obtaining RSI or buying products. We examine the effect of RSI on retail pricing strategies and profits under restricting rights. We formulate a game-theoretical model which consists of one insurer, a retailer and two types of consumers (informed consumers and uninformed consumers). By solving the model, we find that even though the insurer has restricted uninformed consumers from obtaining RSI, the retailer further restricts them from buying the product when the salvage value is low. Second, when the retailer and insurer have no right to restrict uninformed consumers, purchasing RSI may hurt the retailer. Third, when the insurer restricts uninformed consumers and the product salvage is low, the retailer adopts the high-price strategy; otherwise, the retailer adopts the low-price strategy. Finally, when the product salvage is low, the retailer will prevent uninformed consumers from buying the product by adopting the high-price strategy or using the restricting right. In this case, the insurer will set a higher premium.