When More Can Be Less: The Effect of Add-on Insurance on the Consumption of Professional Services

77 Pages Posted: 6 Apr 2022 Last revised: 18 Jul 2022

See all articles by Hongfei Li

Hongfei Li

Chinese University of Hong Kong

Jing Peng

University of Connecticut - Department of Operations & Information Management

Xinxin Li

University of Connecticut - Department of Operations & Information Management

Jan Stallaert

University of Connecticut - School of Business

Date Written: March 18, 2022

Abstract

The emergence of online platforms for professional services (e.g., cosmetic procedures) represents a natural progression of e-commerce from search and experience goods to credence goods. Due to the deeply consequential nature of professional services and the large information asymmetries between customers and service providers, designing effective risk-reduction strategies is crucial for facilitating digital transactions of professional services. In this paper, we study whether and how the introduction of a novel risk-reduction strategy, the add-on insurance covering the potential cost of negative consequences (e.g., complications and unsatisfactory outcomes), affects the demand for professional services in online platforms. We leverage a policy change in an online platform for cosmetic procedures, which started to offer the add-on insurance for a subset of cosmetic procedures in 2016. Our empirical analysis shows that this risk-reduction strategy has asymmetric effects on low- and high- risk procedures. Specifically, the introduction of insurance increases the sales of low-risk procedures, but not that of high-risk ones. More importantly, the insurance has a negative spillover effect on uninsured competitors of insured procedures, regardless of their risk levels. The negative spillover effect of insurance on high-risk procedures is noteworthy because it hurts the sales of their uninsured competitors without increasing their own sales, suggesting that the negative spillover effect goes beyond the typical demand cannibalization explanation and can decrease the overall demand for high-risk procedures. We further corroborate our findings and investigate the mechanisms behind the asymmetric treatment effects and the negative spillover effect using an online controlled experiment. Our findings have important implications for platforms to design, deploy, and evaluate their risk-reduction strategies.

Keywords: Cosmetic Procedure, Online Platforms, Add-on Insurance, Risk Reduction, Spillover Effect

Suggested Citation

Li, Hongfei and Peng, Jing and Li, Xinxin and Stallaert, Jan and Submitter, UCONN Business School, When More Can Be Less: The Effect of Add-on Insurance on the Consumption of Professional Services (March 18, 2022). Information Systems Research (Forthcoming), University of Connecticut School of Business Research Paper No. 22-08, Available at SSRN: https://ssrn.com/abstract=4064332

Hongfei Li

Chinese University of Hong Kong

39439679 (Phone)
999077 (Fax)

HOME PAGE: http://www.bschool.cuhk.edu.hk/staff/li-hongfei/

Jing Peng (Contact Author)

University of Connecticut - Department of Operations & Information Management ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

Xinxin Li

University of Connecticut - Department of Operations & Information Management ( email )

2100A Hillside Rd
Storrs, CT 06269
United States
(860) 486-3062 (Phone)

Jan Stallaert

University of Connecticut - School of Business ( email )

368 Fairfield Road
Storrs, CT 06269-2041
United States

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