Leveraging Return Shipping Insurance as a Differentiation Strategy: The Influence of Consumer Preferences and Market Competition

The rise of e-commerce and the prevalence of online shopping have made it a significant part of consumers' lives. However, its inherent uncertainties have also led to a surge in product returns, posing substantial challenges for retailers. Return shipping insurance has thus emerged as a key strategy to mitigate return-related issues. This study develops a duopoly competition framework based on the Hotelling model, incorporating consumer heterogeneity (sensitive and non-sensitive consumers), to systematically examine the impact of different return shipping insurance strategies (models NN, RN, NR, and RR) on retailer pricing, demand, and profit. The research finds that offering return shipping insurance elevates product prices, but its effect on demand depends on the proportion of sensitive consumers in the market: insurance effectively stimulates demand only when this proportion is high. In markets with symmetric costs, competition typically drives firms toward identical insurance strategies. Under cost asymmetry, however, insurance becomes a crucial instrument for shaping the competitive landscape. Specifically, in markets with a high proportion of sensitive consumers and intense competition, a high-cost retailer can establish service differentiation by exclusively offering insurance, thereby accessing a segment willing to pay a premium. Meanwhile, a low-cost retailer makes flexible decisions based on the proportion of sensitive consumers: when the proportion is low, it forgoes insurance to serve the mass market with its cost advantage; when the proportion is high, it offers insurance to lead the industry's service standard and consolidate its efficiency advantage.