Optimal Return Shipping Insurance Policy with Consumers' Anticipated Regret

Problem Definition: We study return shipping insurance (RSI) policies prevalent on major online platforms such as Taobao.com and JD.com. Retailers on those platforms can purchase and provide RSI for consumers (RRSI) or offer an option for consumers to buy RSI themselves (CRSI). With either RSI, consumers will be partially compensated by an insurer for their shipping fees associated with product returns. As the consumers' uncertainty about product fit is realized only after purchase, their decisions whether to purchase CRSI may lead to post-purchase regret. Considering these anticipated regret behaviors, we investigate the optimal RSI policy for a monopolistic online retailer and an insurer. Methodology/Results: By using non-cooperative game theory, we show that the retailer offers RRSI only if the retailer's return handling cost is relatively low and the return shipping cost is in an intermediate range; otherwise, the consumers' strong propensity for uninsured regret may stimulate them to purchase CRSI. Under the optimal RRSI policy, the retailer always charges a higher product price than under no RSI, and surprisingly the consumer demand could expand. In contrast, under the optimal CRSI policy, the retailer always sets a lower product price, but resulting in consumer demand shrinkage. Counterintuitively, CRSI may become a ``win-win-win" policy for the retailer, insurer, and consumers. Managerial Implications: We provide a rationale for the prevalent RRSI and CRSI policies and further shed lights on choices between these two insurance policies. Furthermore, our results reveal that retailers can utilize RSI as a tool to further improve profitability, no matter whether a full-refund or partial-refund product return policy is employed