Complimentary return-freight insurance serves the dark side: An innovative online return policy in China

Abstract

E-commerce is a typical form of retail digitalization that introduces online uncertainty and product returns. To decrease the negative influence of online uncertainty, the largest Chinese e-commerce company, the Alibaba Group, invited an insurance company to develop return-freight insurance (RFI), a new kind of insurance, to compensate for consumers' losses in the event of online product returns. Complimentary RFI can increase consumer confidence in the retailer and attract more demand. Retailers who offer complimentary RFI demonstrate to consumers that their products and services are too good to incur excessive product returns. However, some low-quality online retailers can mimic competitors’ behavior by offering complimentary RFI to consumers. This study aims to introduce an innovative online return policy based on RFI and to explore whether low-quality online retailers would use complimentary RFI as their return strategy to mislead consumers. Using signaling theory, we built a conceptual economic model that includes three exogenous pricing variables: RFI, insurance premium, and compensation. These variables play different roles in the model because consumers cannot observe the insurance premium, but the compensation can be. The main finding of this study is that innovative complimentary RFI could be abused by low-type retailers when the premium and compensation are appropriate. Interestingly, compensation plays different roles for retailers with different product values: low-type retailers use complimentary RFI as a noise tool. When the product works for the consumer and the insurance profit is not too high, the compensation for the low-quality product should be larger than that for the high-quality product, which is different from conventional wisdom. Although high-type online retailers may use complimentary RFI as a product quality signal, there is still a significant risk that nefarious elements will use it to create product quality noise.

Keywords

• Return-freight insurance
• Return policy
• Noise/signal effect
• Adverse selection