IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v61y2015i8p1812-1829.html
   My bibliography  Save this article

Signaling New Product Reliability with After-Sales Service Contracts

Author

Listed:
  • Nitin Bakshi

    () (London Business School, Regent’s Park, London NW1 4SA, United Kingdom)

  • Sang-Hyun Kim

    () (Yale School of Management, Yale University, New Haven, Connecticut 06511)

  • Nicos Savva

    () (London Business School, Regent’s Park, London NW1 4SA, United Kingdom)

Abstract

Prior studies on performance-based contracting (PBC) for after-sales services have highlighted its advantages over traditional resource-based contracting (RBC), when products are established and their reliability is known to all parties. We develop a game theoretic model to investigate how these insights are affected when the vendor is privately informed about the reliability of a newly developed product. A novel feature of our model is the interaction between reliability signaling (private information) and the vendor’s discretionary investment in spares inventory (private action), which arises naturally in the setting we consider. We find that this interaction leads to contrasting equilibrium outcomes under the two contracts: RBC induces the vendor to focus on inventory savings, leading to underinvestment in spares, whereas PBC induces the vendor to focus on reliability signaling, achieved through overinvestment in inventory. As a result, neither contract is efficient. We investigate two means to mitigate this inefficiency, but either approach has caveats: (a) making inventory verifiable removes the trade-off between reliability signaling and inventory investment, but results in diverging contract preferences between the vendor and the buyer; (b) pooling inventories across multiple buyers saves inventory costs but it also hinders reliability signaling, potentially exacerbating inefficiency. This paper was accepted by Yossi Aviv, operations management .

Suggested Citation

  • Nitin Bakshi & Sang-Hyun Kim & Nicos Savva, 2015. "Signaling New Product Reliability with After-Sales Service Contracts," Management Science, INFORMS, vol. 61(8), pages 1812-1829, August.
  • Handle: RePEc:inm:ormnsc:v:61:y:2015:i:8:p:1812-1829
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.2014.2029
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:wsi:apjorx:v:34:y:2017:i:01:n:s0217595917400024 is not listed on IDEAS

    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:inm:ormnsc:v:61:y:2015:i:8:p:1812-1829. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc). General contact details of provider: http://edirc.repec.org/data/inforea.html .

    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.

    We have no references for this item. You can help adding them by using 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.