When should the e-tailer offer complimentary return-freight insurance ?

Abstract

Consumers have recently become very concerned about the role of return-freight insurance (RI) in the e-commerce platform, where it appears prior to making the online purchase decision. In an effort to encourage consumers to buy products, some e-tailers will offer complimentary return-freight insurance (CRI), and it has become an established and recognized practice. Some e-tailers have stopped offering this resource, however, and offer consumers the opportunity to purchase RI. To examine an e-tailer's RI strategy, we consider a market consisting of a manufacturer and an e-tailer. Three alternative scenarios are investigated: 1) Scenario N where there is no RI; 2) Scenario C where consumers may purchase RI; and 3) Scenario S where the e-tailer offers CRI. We find that the introduction of RI increases the price level, and it does not necessarily benefit the manufacturer and the e-tailer. The RI premium incurred by the e-tailer and the return-freight compensation play a critical role in selecting the RI strategy. When the former is low and the latter is high, the e-tailer is willing to offer CRI. Meanwhile, the manufacturer has the incentive to bear the RI premium for the e-tailer.