Return shipping insurance: Free versus for-a-fee?

Return shipping insurance (RSI) has been widely adopted by retailers on major online platforms such as Taobao.com and JD.com to compensate online consumers for their return shipping fee. There are two types of RSI, namely free RSI (f-RSI), under which the retailer covers the RSI premium, and for-a-fee RSI (faf-RSI), under which consumers pay the premium. We study the optimal f-RSI and faf-RSI strategies for a monopolistic online retailer as well as the impact RSI on the retailer's returns policy. First, we find that RSI is complementary to the partial-refund returns policy as it further increases the retailer's profit. Specifically, the retailer adopts the RSI strategy if and only if the RSI premium is relatively small; in addition, the RSI strategy is more appealing with a higher RSI compensation and product salvage value, and a smaller return shipping cost. Second, we find that under the f-RSI strategy, the retailer does not change its refund price, i.e., the refund amount equals the product salvage value; while, under the faf-RSI strategy, the retailer changes its refund price strategically according to the RSI premium, compensation, and number of RSI-sensitive consumers. Third, we find that the f-RSI strategy dominates the faf-RSI strategy from the profit and social welfare perspectives; whereas, the faf-RSI may lead to a “win-win” situation for the retailer and consumers.