Events

Dr. Hongfei Li
Assistant Professor
Department of Decision Sciences and Managerial Economics
The Chinese University of Hong Kong

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. Due to the deeply consequential nature of professional services and the large information asymmetries between customers and service providers, designing effective risk-reduction strategies are 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. In doing so, we leverage a natural experiment on an online platform for cosmetic procedures, which started to offer the add-on insurance for a subset of cosmetic procedures in 2016. Our empirical study 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 that 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 insurance can decrease the overall demand for high-risk procedures. We further investigate the mechanisms behind the asymmetric treatment effects and the negative spillover effect beyond demand cannibalization using an online controlled experiment. Our findings have important implications for platforms to design, deploy, and evaluate their risk-reduction strategies.