Optimal Return Shipping Insurance Policy with Consumers' Anticipated Regret

Production and Operations Management

57 Pages Posted: 27 Sep 2021 Last revised: 15 May 2024

See all articles by Yiming Li

Yiming Li

Xi'an Jiaotong University (XJTU) - School of Management

Gang Li

Xi'an Jiaotong University (XJTU) - School of Management

Xiajun Amy Pan

University of Florida - Warrington College of Business Administration

Date Written: August 27, 2021

Abstract

We study return shipping insurance (RSI) policies prevalent on platforms such as JD.com and Taobao.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 decision 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. We show that the retailer offers RRSI only if the retailer's return handling cost is relatively low and consumers' 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.

Keywords: return shipping insurance; anticipated regret; behavioral economics; pricing; product returns

Suggested Citation

Li, Yiming and Li, Gang and Pan, Xiajun Amy, Optimal Return Shipping Insurance Policy with Consumers' Anticipated Regret (August 27, 2021). Production and Operations Management, Available at SSRN: https://ssrn.com/abstract=3912844

Yiming Li

Xi'an Jiaotong University (XJTU) - School of Management ( email )

28,Xianning West Road
Xi'an, Shaanxi 710049
China

Gang Li

Xi'an Jiaotong University (XJTU) - School of Management ( email )

28,Xianning West Road
Xi'an, Shaanxi 710049
China

Xiajun Amy Pan (Contact Author)

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

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