Return insurance in a competitive market: Benefiting the high-quality or low-quality retailer?

Return shipping insurance (return insurance), as emerging insurance on many online platforms (e.g., Taobao.com and JD.com), develops rapidly in China over the past decade. Many retailers on the platforms purchase return insurance for consumers to reduce consumers’ hassle cost, while some retailers abandon return insurance. To investigate the retailers’ divergence on the adoption of the return insurance, we build a duopoly model in which two competing online retailers with different quality levels sell products to consumers who have uncertainty about their satisfaction. Both retailers can choose whether to purchase return insurance at different premiums. Our finding shows that as long as the increase in the consumers’ expected utility is higher than the cost of premium, the retailer is better off offering return insurance, independent of his competitor’s decision. Then, when the premium for the high-quality product is sufficiently low and the premium for the low-quality product is sufficiently high, the retailer with the high-quality product purchases return insurance for consumers and the retailer with the low-quality product abandons return insurance. Moreover, when both retailers offer return insurance, the retailer with the high-quality product may reduce or increase the retail price and the retailer with the low-quality product always increases the retail price. Finally, we examine the interaction between the retailers’ decisions on quality levels and the adoption of return insurance, and show that both retailers may improve quality levels when offering return insurance.