When More Can Be Less: The Effect of Add-On Insurance on the Consumption of Professional Services

Hongfei Li (), Jing Peng (), Xinxin Li () and Jan Stallaert ()
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Hongfei Li: CUHK Business School, The Chinese University of Hong Kong, Hong Kong
Jing Peng: School of Business, University of Connecticut, Storrs, Connecticut 06269
Xinxin Li: School of Business, University of Connecticut, Storrs, Connecticut 06269
Jan Stallaert: School of Business, University of Connecticut, Storrs, Connecticut 06269

Information Systems Research, 2023, vol. 34, issue 1, 363-382

Abstract: The emergence of online platforms for professional services (e.g., cosmetic procedures) represents a natural progression of e-commerce from search and experience goods to credence goods. Because of the deeply consequential nature of professional services and the large information asymmetries between customers and service providers, designing effective risk-reduction strategies is crucial for facilitating digital transactions of professional services. In this paper, we study whether and how the introduction of a novel risk-reduction strategy, the add-on insurance covering the potential cost of negative consequences (e.g., complications and unsatisfactory outcomes), affects the demand for professional services in online platforms. We leverage a policy change in an online platform for cosmetic procedures, which started to offer the add-on insurance for a subset of cosmetic procedures in 2016. Our empirical analysis shows that this risk-reduction strategy has asymmetric effects on low- and high-risk procedures. Specifically, the introduction of insurance increases the sales of low-risk procedures, but not those of high-risk ones. More importantly, the insurance has a negative spillover effect on uninsured competitors of insured procedures, regardless of their risk levels. The negative spillover effect of insurance on high-risk procedures is noteworthy because it hurts the sales of their uninsured competitors without increasing their own sales, suggesting that the negative spillover effect goes beyond the typical demand cannibalization explanation and can decrease the overall demand for high-risk procedures. We further corroborate our findings and investigate the mechanisms behind the asymmetric treatment effects and the negative spillover effect using an online controlled experiment. Our findings have important implications for platforms to design, deploy, and evaluate their risk-reduction strategies.

Keywords: cosmetic procedure; online platform; add-on insurance; risk reduction; spillover effect (search for similar items in EconPapers)
Date: 2023
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