Abstract: The strategic choice of return-freight insurance strategies for an e-tailer is studied with bounded rational consumers taken into consideration. There are three strategies for the e-tailer to choose: only offering the money-back guarantee (MBG), offering complimentary return-freight insurance (CRI), and offering return-freight insurance purchase options for consumers to decide whether to purchase. Our research finds the following results. (1) The bounded rationality of consumers will benefit the e-tailers who introduce return freight insurance product if the product is highly satisfying to consumers and will damage the e-tailers if the product is less satisfying to them. (2) If the e-tailer introduces RI policy and sets a very high RI premium, then consumers may give up purchasing RI, as result of which, return-freight insurance will not work as intended. (3) RI policy is always the optimal return-freight insurance strategy for the e-tailer as long as the return-freight insurance premiums are set below a certain threshold. Only when the freight insurance is pruced at a low premium, can the e-tailer achieve higher profitability from CRI policy than by offering only return service. (4) Due to the effect of the bounded rationality, only when return-freight insurance is priced at a low premium, can consumers obtain greater consumer surplus when the e-tailer offers return-freight insurance services than when they do not. In addition, the “contingency policy” for consumer returns is also analyzed and it is found that the “contingency policy” does not increase the e-tailer’s profit.

Key words: bounded rationality, return-freight insurance, product returns, contingency policy