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Usage Heterogeneity and Extended Warranties

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  • V. Padmanabhan

Abstract

The role of product warranty in segmentation of consumer durable product markets is highlighted. I demonstrate that consumer moral hazard and heterogeneity in product usage create variation in the valuation of product warranties by the different segments in the market. In this context, the firm, by offering a self‐selecting menu of base warranty and extended warranties, satisfies the warranty demands of the various segments of the population. The consumer choice behavior prediction of the theory with regard to extended warranty is empirically validated with data from a survey of new car buyers.

Suggested Citation

  • V. Padmanabhan, 1995. "Usage Heterogeneity and Extended Warranties," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 4(1), pages 33-53, March.
    • Handle: RePEc:bla:jemstr:v:4:y:1995:i:1:p:33-53
    DOI: 10.1111/j.1430-9134.1995.00033.x
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    Cited by:

    1. 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.
    2. Wang, Xiaolin & Zhao, Xiujie & Liu, Bin, 2020. "Design and pricing of extended warranty menus based on the multinomial logit choice model," European Journal of Operational Research, Elsevier, vol. 287(1), pages 237-250.
    3. 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.
    4. Bouguerra, Soumaya & Chelbi, Anis & Rezg, Nidhal, 2012. "A decision model for adopting an extended warranty under different maintenance policies," International Journal of Production Economics, Elsevier, vol. 135(2), pages 840-849.
    5. Joseph C. Hartman & Kamonkan Laksana, 2009. "Designing and pricing menus of extended warranty contracts," Naval Research Logistics (NRL), John Wiley & Sons, vol. 56(3), pages 199-214, April.
    6. Guillermo Gallego & Ruxian Wang & Ming Hu & Julie Ward & Jose Luis Beltran, 2015. "No Claim? Your Gain: Design of Residual Value Extended Warranties Under Risk Aversion and Strategic Claim Behavior," Manufacturing & Service Operations Management, INFORMS, vol. 17(1), pages 87-100, February.
    7. Seshimo, Hiroyuki, 2020. "A justification for caveat emptor in the secondhand market: Risk transfer, enforcement cost and insurance," Economic Analysis and Policy, Elsevier, vol. 66(C), pages 217-235.
    8. N Jack & D N P Murthy, 2007. "A flexible extended warranty and related optimal strategies," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 58(12), pages 1612-1620, December.
    9. Bian, Yiwen & Xie, Jiazheng & Archibald, Thomas W. & Sun, Yanhong, 2019. "Optimal extended warranty strategy: Offering trade-in service or not?," European Journal of Operational Research, Elsevier, vol. 278(1), pages 240-254.
    10. 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.
    11. 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.
    12. Wang, Jinting & Zhou, Zhuang & Peng, Hao, 2017. "Flexible decision models for a two-dimensional warranty policy with periodic preventive maintenance," Reliability Engineering and System Safety, Elsevier, vol. 162(C), pages 14-27.
    13. Jose A. Guajardo & Morris A. Cohen & Sang-Hyun Kim & Serguei Netessine, 2012. "Impact of Performance-Based Contracting on Product Reliability: An Empirical Analysis," Management Science, INFORMS, vol. 58(5), pages 961-979, May.
    14. Pranav Jindal, 2015. "Risk Preferences and Demand Drivers of Extended Warranties," Marketing Science, INFORMS, vol. 34(1), pages 39-58, January.
    15. 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.
    16. Liu, Bin & Shen, Lijuan & Xu, Jianyu & Zhao, Xiujie, 2020. "A complimentary extended warranty: Profit analysis and pricing strategy," International Journal of Production Economics, Elsevier, vol. 229(C).
    17. 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.
    18. 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.
    19. 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.
    20. Lei, Yong & Liu, Qian & Shum, Stephen, 2017. "Warranty pricing with consumer learning," European Journal of Operational Research, Elsevier, vol. 263(2), pages 596-610.

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