How Pricing Interacts with Return Insurance in Dual-channel Retailing

It is an important issue to consider pricing inconsistency in dual-channel retailing. This paper studies a dual-channel retailer's optimal pricing policy with return insurance. We allow price differentiation across channels, model consumer heterogeneity and consider consumers' product return behavior. In particular, we consider three prevalent return insurance strategies: (i) no return insurance (Scenario N), (ii) retailer's free return insurance (Scenario R) and (iii) consumers' decision to purchase return insurance (Scenario C). For a dual-channel retailer who decides to provide free return insurance, we find that raising online prices is necessary. Furthermore, online price is higher than in-store price; however, when free return insurance is not offered, offline price can be higher than online price to stimulate online sales. Through pairwise comparisons of the three scenarios, we show theoretically that the effect of return insurance on price and demand is not monotonous. Specifically, when the valuation is high and consumers' return cost is high relative to the return insurance premium, the dual-channel retailer has an incentive to attract more online demand after introducing return insurance, and may even raise both online and offline prices to extract profits. However, retailers should carefully modify their pricing policy according to the different return insurance scenarios and consumer behavior. With a detailed analysis of optimal pricing and market segmentation, we discuss the rationale for this result. We also find that return insurance improves the dual-channel retailer's profitability only when it sells high-value products and consumers' return cost is high. Notably, in this case, offering free return insurance generates the same profit as providing consumers with an option of purchasing return insurance themselves. Our study highlights that return insurance can serve as an effective tool for dual-channel retailers when combined with strategic pricing