Collection responsibility and freight insurance strategies for an e‐tailing supply chain in the presence of managerial optimism

Abstract Entrepreneurs are usually optimistic when they offer return policies. We investigate the strategic interaction between the manufacturer's collection responsibility strategy (returns handled by the manufacturer or the e‐tailer) and the e‐tailer's complimentary return‐freight insurance strategy (whether to offer this insurance or not) in the presence of managerial optimism. It is found that the manufacturer's collection responsibility strategy creates the (implicit) incentive for the e‐tailer to offer complimentary return‐freight insurance. A high level of optimism and return handling costs expand the equilibrium range over which the manufacturer collects returns, and the e‐tailer offers complimentary return‐freight insurance. Contrary to conventional wisdom, we find that unilateral optimism does not always lead to a win‐win situation, but it can still result in suboptimal results on the other side. Finally, despite possibly high shipping costs, the e‐tailer's refusal to offer complimentary return‐freight insurance still benefits consumers, implying that managers with high optimism level benefit consumers.