Return Freight Insurance: Implications for Online Platforms, Third-party Retailers and Consumers

In this paper, we investigate the effect of return freight insurance (RFI) in an online platform setting where two competing third-party retailers provide RFI to consumers. First, we find that RFI generally increases the price level on the platform. Second, we find that when retailers have same base return rates, retailers’ profits are not changed while the platform’s profit is increased. Whereas, when retailers have different base return rates, RFI only benefits the retailer with high base return rate and harms the retailer with low base return rate, and RFI benefits the platform if and only if the product differentiation degree is relatively large. Third, we find RFI increases customer surplus if RFI’s return hassle cost reduction (HCR) and/or willingness-to-pay enhancement (WTPE) effect is relatively strong. Moreover, we find RFI increases social welfare if RFI’s HCR and/or WTPE effect is relatively strong and the product differentiation degree is relatively large. Such findings offer guidelines for online platforms and third-party retailers to design appropriate RFI provision strategies.