Optimal Return Freight Insurance Policies in a Competitive Environment

Abstract

In recent years, return freight insurance (RFI) has emerged as a solution to the problem of returns of goods purchased online. However, although RFI reduces the return costs of both parties and increases the purchase intention of consumers, it also increases the rate of returns and reduces retailers’ profits. Therefore, some online retailers have looked at increasing their service effort as a means of improving the service level and reducing the rate of returns. Considering the impact of retailers’ service efforts on consumer returns, the retailers’ choice of RFI strategy is very important for its profit. It is worth studying how retailers choose RFI policies and the pricing and service effort level in different market environments. In this study, we examine the retailers’ RFI decision-making process, including the influence of retail service effort on consumer returns, by developing three duopolistic-competition game models based on three RFI markets. In this case, we analyze and compare the retailers’ optimal pricing decisions, optimal service effort decisions, and optimal profits in each RFI market, and identify the relationship between the retailers’ optimal decisions and the degree of competition. The result shows that under the market where RFI is provided by the retailer, the retailers’ optimal pricing and optimal service effort level both increase with the increase of market competition. In addition, retailers should consider the impact of market competition and return compensation on consumer demand when making the decision of whether to offer freight insurance.