IDEAS home Printed from https://ideas.repec.org/p/ecl/illbus/05-0128.html
   My bibliography  Save this paper

Design of Extended Warranties in Supply Chains

Author

Listed:
  • Li, Kunpeng

    (U of Illinois at Urbana-Champaign)

  • Chhajed, Dilip

    (U of Illinois at Urbana-Champaign)

  • Mallik, Suman

    (U of Illinois at Urbana-Champaign)

Abstract

Consider a supply chain involving an independent retailer and an independent manufacturer. The manufacturer produces a single product and sells it exclusively through the retailer. Using this supply chain framework, we develop a game theoretic model to study two commonly observed practices of selling extended warranties: the manufacturer offers the extended warranty directly to the end consumer, and the retailer selling the product offers extended warranty. We show that, of the two decentralized systems, when the retailer offers an extended warranty, it is for a longer duration and generates more system profit. We compare and contrast the two decentralized models with a centralized system where a single party manufactures the product, sells to the consumer and offers the extended warranty. We identify the different causes of inefficiencies in each of the two decentralized models and propose coordination mechanisms that eliminate the inefficiencies. We also provide contracts to achieve both coordination and a Pareto improvement over a wholesale price contract.

Suggested Citation

  • Li, Kunpeng & Chhajed, Dilip & Mallik, Suman, 2005. "Design of Extended Warranties in Supply Chains," Working Papers 05-0128, University of Illinois at Urbana-Champaign, College of Business.
    • Handle: RePEc:ecl:illbus:05-0128
    as

    Download full text from publisher

    File URL: http://www.business.illinois.edu/Working_Papers/papers/05-0128.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Yves Balcer & Izzet Sahin, 1986. "Replacement Costs Under Warranty: Cost Moments and Time Variability," Operations Research, INFORMS, vol. 34(4), pages 554-559, August.
    2. V. Padmanabhan, 1995. "Usage Heterogeneity and Extended Warranties," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(1), pages 33-53, March.
    3. Morris A. Cohen & Seungjin Whang, 1997. "Competing in Product and Service: A Product Life-Cycle Model," Management Science, INFORMS, vol. 43(4), pages 535-545, April.
    4. Philip H. Dybvig & Nancy A. Lutz, 1993. "Warranties, Durability, and Maintenance: Two-sided Moral Hazard in a Continuous-Time Model," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(3), pages 575-597.
    5. Geoffrey Heal, 1977. "Guarantees and Risk-Sharing," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 549-560.
    6. V. Padmanabhan & Ram C. Rao, 1993. "Warranty Policy and Extended Service Contracts: Theory and an Application to Automobiles," Marketing Science, INFORMS, vol. 12(3), pages 230-247.
    7. Duncan P. Mann & Jennifer P. Wissink, 1988. "Money-Back Contracts with Double Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 19(2), pages 285-292, Summer.
    8. Emons, Winand, 1989. "On the Limitation of Warranty Duration," Journal of Industrial Economics, Wiley Blackwell, vol. 37(3), pages 287-301, March.
    9. Russell Cooper & Thomas W. Ross, 1985. "Product Warranties and Double Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 16(1), pages 103-113, Spring.
    10. Emons, Winand, 1988. "Warranties, moral hazard, and the lemons problem," Journal of Economic Theory, Elsevier, vol. 46(1), pages 16-33, October.
    11. K. Sridhar Moorthy, 1988. "Product and Price Competition in a Duopoly," Marketing Science, INFORMS, vol. 7(2), pages 141-168.
    12. Padmanabhan, V, 1995. "Usage Heterogeneity and Extended Warranties," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(1), pages 33-53, Spring.
    13. Michael Spence, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 44(3), pages 561-572.
    14. Sridhar Balasubramanian & Pradeep Bhardwaj, 2004. "When Not All Conflict Is Bad: Manufacturing-Marketing Conflict and Strategic Incentive Design," Management Science, INFORMS, vol. 50(4), pages 489-502, April.
    15. Lutz, Nancy A. & Padmanabhan, V., 1998. "Warranties, extended warranties, and product quality," International Journal of Industrial Organization, Elsevier, vol. 16(4), pages 463-493, July.
    16. Ganesh Iyer, 1998. "Coordinating Channels Under Price and Nonprice Competition," Marketing Science, INFORMS, vol. 17(4), pages 338-355.
    17. Nancy A. Lutz & V. Padmanabhan, 1995. "Why Do We Observe Minimal Warranties?," Marketing Science, INFORMS, vol. 14(4), pages 417-441.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kunpeng Li & Suman Mallik & Dilip Chhajed, 2012. "Design of Extended Warranties in Supply Chains under Additive Demand," Production and Operations Management, Production and Operations Management Society, vol. 21(4), pages 730-746, July.
    2. Aidan Hollis, 1996. "Exclusivity Restrictions in Markets with Adverse Selection: The Case of Extended Warranties," Working Papers ecpap-96-03, University of Toronto, Department of Economics.
    3. Lei, Yong & Liu, Qian & Shum, Stephen, 2017. "Warranty pricing with consumer learning," European Journal of Operational Research, Elsevier, vol. 263(2), pages 596-610.
    4. Murthy, D. N. P. & Djamaludin, I., 2002. "New product warranty: A literature review," International Journal of Production Economics, Elsevier, vol. 79(3), pages 231-260, October.
    5. Lu, Zhen & Shang, Jennifer, 2019. "Warranty mechanism for pre-owned tech products: Collaboration between E-tailers and online warranty provider," International Journal of Production Economics, Elsevier, vol. 211(C), pages 119-131.
    6. Junhong Chu & Pradeep K. Chintagunta, 2009. "Quantifying the Economic Value of Warranties in the U.S. Server Market," Marketing Science, INFORMS, vol. 28(1), pages 99-121, 01-02.
    7. Chen, Xu & Li, Ling & Zhou, Ming, 2012. "Manufacturer's pricing strategy for supply chain with warranty period-dependent demand," Omega, Elsevier, vol. 40(6), pages 807-816.
    8. Jianhua Ma & Xingzheng Ai & Wen Yang & Yanchun Pan, 2019. "Decentralization versus coordination in competing supply chains under retailers’ extended warranties," Annals of Operations Research, Springer, vol. 275(2), pages 485-510, April.
    9. Giorgio Coricelli & Luigi Luini, 1999. "Double Moral Hazard: an Experiment on Warranties," CEEL Working Papers 9901, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
    10. Lianmin Zhang & Lei Guan & Daniel Zhuoyu Long & Houcai Shen & Huajun Tang, 2023. "Who is better off by selling extended warranties in the supply chain: the manufacturer, the retailer, or both?," Annals of Operations Research, Springer, vol. 328(2), pages 1557-1583, September.
    11. Marlin U. Thomas & Sridevi S. Rao, 1999. "Warranty Economic Decision Models: A Summary and Some Suggested Directions for Future Research," Operations Research, INFORMS, vol. 47(6), pages 807-820, December.
    12. Desai Preyas S & Padmanabhan Paddy, 2004. "Durable Good, Extended Warranty and Channel Coordination," Review of Marketing Science, De Gruyter, vol. 2(1), pages 1-25, January.
    13. Boom, Anette, 1998. "Product risk sharing by warranties in a monopoly market with risk-averse consumers," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 241-257, January.
    14. Bo Jiang & Xubing Zhang, 2011. "How Does a Retailer's Service Plan Affect a Manufacturer's Warranty?," Management Science, INFORMS, vol. 57(4), pages 727-740, April.
    15. Lutz, Nancy A. & Padmanabhan, V., 1998. "Warranties, extended warranties, and product quality," International Journal of Industrial Organization, Elsevier, vol. 16(4), pages 463-493, July.
    16. Tao Na & Zhang Sheng, 2015. "Designing the Optimal Extended Warranty Price with Indirect Network Effect," Journal of Systems Science and Information, De Gruyter, vol. 3(1), pages 59-67, February.
    17. Joaquín Coleff, 2020. "Can consumer complaints reduce product reliability? Should we worry?," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(1), pages 74-96, January.
    18. Alena Podaneva & Pierre Picard, 2023. "Facility Management Services in UK Hospitals: in-house or outsourcing," DEM Discussion Paper Series 23-15, Department of Economics at the University of Luxembourg.
    19. Subramanian Balachander, 2001. "Warranty Signalling and Reputation," Management Science, INFORMS, vol. 47(9), pages 1282-1289, September.
    20. Philip H. Dybvig & Nancy A. Lutz, 1993. "Warranties, Durability, and Maintenance: Two-sided Moral Hazard in a Continuous-Time Model," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(3), pages 575-597.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecl:illbus:05-0128. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/cbuiuus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.