How do people value extended warranties?: Evidence from two field surveys
AbstractExtended warranties are popular but expensive. This paper examines how consumers value these warranties, and asks whether economic considerations alone can account for their popularity. Results from two field surveys show that consumers greatly overestimate both the likelihood and the cost of product breakdown. However, these biases alone do not explain their willingness to buy them. In fact, we find evidence of probability neglect, in which warranty purchase decision depends on the magnitude of the possible consequences of not having insurance and not on the probability of having to suffer these consequences. The expected emotional benefits ("peace of mind") from having a warranty was the best predictor of purchase decision and willingness to pay. We also found that people with higher numeracy and cognitive skills are less likely to overestimate the economic determinants of warranty value, yet are still highly influenced by emotional considerations when deciding whether to purchase a warranty. We conclude by arguing that consumer welfare could be improved by increasing the competitive intensity in the market for warranties.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Durham University Business School in its series Working Papers with number 2008_02.
Date of creation: 01 Jun 2008
Date of revision:
Contact details of provider:
Postal: Durham University Business School, Mill Hill Lane, Durham DH1 3LB, England
Phone: +44 (0)191 334 5200
Fax: +44 (0)191 334 5201
Web page: http://www.dur.ac.uk/business
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Xavier Gabaix & David Laibson, 2006.
"Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets,"
The Quarterly Journal of Economics,
MIT Press, vol. 121(2), pages 505-540, May.
- Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
- Gabaix, Xavier & Laibson, David I., 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," Scholarly Articles 4554333, Harvard University Department of Economics.
- Fang, Hanming & Keane, Michael & Silverman, Dan, 2006.
"Sources of Advantageous Selection: Evidence from the Medigap Insurance Market,"
17, Yale University, Department of Economics.
- Hanming Fang & Michael P. Keane & Dan Silverman, 2008. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," Journal of Political Economy, University of Chicago Press, vol. 116(2), pages 303-350, 04.
- Hanming Fang & Michael P. Keane & Dan Silverman, 2006. "Sources of Advantageous Selection: Evidence from the Medigap Insurance Market," NBER Working Papers 12289, National Bureau of Economic Research, Inc.
- Hogarth, Robin M & Kunreuther, Howard, 1995. "Decision Making under Ignorance: Arguing with Yourself," Journal of Risk and Uncertainty, Springer, vol. 10(1), pages 15-36, January.
- Hsee, Christopher K & Kunreuther, Howard C, 2000. " The Affection Effect in Insurance Decisions," Journal of Risk and Uncertainty, Springer, vol. 20(2), pages 141-59, March.
- Xavier Gabaix & David Laibson & Guillermo Moloche & Stephen Weinberg, 2005. "Information Acquisition: Experimental Analysis of a Boundedly Rational Model," Levine's Bibliography 666156000000000480, UCLA Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (IT Office).
If references are entirely missing, you can add them using this form.