Maximizing Consumer Surplus via Return Freight Insurance: Single Insurer Monopoly Versus Competitive Provision

This paper examines how e-commerce retailers should structure return freight insurance (RFI) partnerships—exclusive single-insurer or competitive multi-insurer—to maximize consumer surplus. Using a game-theoretic model with heterogeneous consumers and vertically differentiated insurance products, we find that monopolistic RFI provision can paradoxically enhance consumer welfare over competition when markets exhibit high heterogeneity, limited loss aversion, and low compensation levels. The monopoly’s advantage stems from unified risk pooling, preventing adverse selection, cross-subsidization maintaining universal coverage, and quality preservation avoiding competitive price degradation. Optimal premiums show non-monotonic relationships with market parameters, creating distinct pricing regimes. Our results suggest retailers should match market structure to consumer characteristics: exclusive arrangements for heterogeneous, price-sensitive markets, while competitive provision for homogeneous, loss-averse segments. These insights advance our understanding of platform economics and inform tailored market design for internet insurance.