How Pricing Interacts With Return Insurance in Dual-channel Retailing

Abstract

This study explores optimal pricing in dual-channel retailing with return insurance, considering price differentiation across channels, consumer heterogeneity, and return behavior. Three prevalent return insurance scenarios are examined: first, no return insurance (Scenario N), second, retailer's free return insurance (Scenario R), and third, consumers' purchasing return insurance (Scenario C). Findings first suggest that when a retailer offers free return insurance, it should set higher prices online compared to offline. Conversely, if no free return insurance is provided, lowering the online price can encourage more online sales. Interestingly, the impact of return insurance on pricing and demand is nonintuitive. When product value and consumers' return cost are high, the introduction of return insurance leads to price increases across both online and offline channels, and simultaneously boosts online demand. Finally, we also find that return insurance does not always improve profitability for the dual-channel retailer. The retailer only benefits from introducing return insurance if the product has high value and consumers face substantial return costs. The study highlights the role of return insurance as an important tool for dual-channel retailers when combined with strategic pricing.