Offering return-freight insurance or not: Strategic analysis of an e-seller's decisions

In an attempt to encourage consumers to buy products online, many e-sellers buy return-freight insurance (RI) for them (consumers are compensated for return-freight fees after returning products). The type of the e-seller is determined by the selling format that exists between an e-commerce platform and a manufacturer: the reselling format where the manufacturer sells products to the platform, which then sells to consumers, and the agency selling format where the manufacturer sells products to consumers directly through the platform. Correspondingly, there are four scenarios to evaluate: an e-seller offering or not offering RI in the two selling formats. We obtain several important findings. First, even if RI is offered, the e-seller will not necessarily increase the retail price, unless the loss caused by per-unit return (per-unit return loss) incurred by the e-seller is moderate. Second, in the agency selling format, offering RI may narrow the consumer market, which is contrary to the e-seller's purpose. In addition, this strategy always leads to more returns and a higher return rate. Finally, when the per-unit return loss is low or high, the e-seller in the reselling format can always benefit from offering RI. When the per-unit return loss is at a moderate level, as the per-unit return loss increases, the e-seller's preference, affected by the RI premium, will evolve from not offering RI, to offering it, and then not offering it. In contrast to the reselling format, the e-seller in the agency selling format needs to utilize the strategy of offering RI more flexibly, however. This is reflected by the fact that as the per-unit return loss increases, the optimal strategy has more conversions between offering and not offering RI.