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How Does a Retailer's Service Plan Affect a Manufacturer's Warranty?

  • Bo Jiang


    (Faculty of Business Administration, The Chinese University of Hong Kong, New Territories, Hong Kong)

  • Xubing Zhang


    (Faculty of Business, The Hong Kong Polytechnic University, Kowloon, Hong Kong)

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    A service plan is a type of optional warranty beyond manufacturers' base warranties that retailers offer to consumers. In this paper, we examine how a service plan affects the role played by a manufacturer's base warranty. Analysis shows that when consumers can assess product quality (i.e., the probability of product failure), the manufacturer's warranty is negatively affected by the presence of a service plan. In the presence of such a plan, a base warranty is offered only when the manufacturer is very cost-efficient in providing a warranty relative to the retailer. In this case, although the double-marginalization problem is aggravated, offering a (limited) base warranty reduces the total warranty cost in the channel and provokes the retailer into enlarging the service plan coverage. When consumers cannot assess product quality, a high-quality manufacturer is motivated to offer a base warranty to signal its quality. In the presence of a service plan, however, a very cost-efficient manufacturer is discouraged from doing so. This paper was accepted by Preyas Desai, marketing.

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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 57 (2011)
    Issue (Month): 4 (April)
    Pages: 727-740

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    Handle: RePEc:inm:ormnsc:v:57:y:2011:i:4:p:727-740
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    1. Gerard J. Tellis & Birger Wernerfelt, 1987. "Competitive Price and Quality Under Asymmetric Information," Marketing Science, INFORMS, vol. 6(3), pages 240-253.
    2. 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.
    3. Sridhar Moorthy & Kannan Srinivasan, 1995. "Signaling Quality with a Money-Back Guarantee: The Role of Transaction Costs," Marketing Science, INFORMS, vol. 14(4), pages 442-466.
    4. Wiener, Joshua Lyle, 1985. " Are Warranties Accurate Signals of Product Reliability?," Journal of Consumer Research, Oxford University Press, vol. 12(2), pages 245-50, September.
    5. Geoffrey Heal, 1977. "Guarantees and Risk-Sharing," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 549-560.
    6. Bryant, W Keith & Gerner, Jennifer L, 1982. "The Demand for Service Contracts," The Journal of Business, University of Chicago Press, vol. 55(3), pages 345-66, July.
    7. Michael Spence, 1977. "Consumer Misperceptions, Product Failure and Producer Liability," Review of Economic Studies, Oxford University Press, vol. 44(3), pages 561-572.
    8. Nancy A. Lutz & V. Padmanabhan, 1995. "Why Do We Observe Minimal Warranties?," Marketing Science, INFORMS, vol. 14(4), pages 417-441.
    9. Esther Gal-Or, 1989. "Warranties as a Signal of Quality," Canadian Journal of Economics, Canadian Economics Association, vol. 22(1), pages 50-61, February.
    10. 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.
    11. Nancy A. Lutz, 1989. "Warranties as Signals under Consumer Moral Hazard," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 239-255, Summer.
    12. Boulding, William & Kirmani, Amna, 1993. " A Consumer-Side Experimental Examination of Signaling Theory: Do Consumers Perceive Warranties as Signals of Quality?," Journal of Consumer Research, Oxford University Press, vol. 20(1), pages 111-23, June.
    13. Mussa, Michael & Rosen, Sherwin, 1978. "Monopoly and product quality," Journal of Economic Theory, Elsevier, vol. 18(2), pages 301-317, August.
    14. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-54, July/Aug..
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