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Warranty design under buyer and seller risk aversion

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  • Peter H. Ritchken
  • Charles S. Tapiero

Abstract

This paper provides a framework in which warranty policies for non‐repairable items can be evaluated according to risk preferences of both buyers and sellers. In particular, a warranty price schedule is established such that sellers are indifferent among the policies. Given this schedule, a buyer's response is expressed by selecting the price‐warranty combination that minimizes disutility. Within this framework, a warranty can be viewed as an instrumet of risk management that can induce more sales and greater profitability. For given utility functions, analytical results for the development of a price schedule are developed. Numerical results illustrate the substitution effects between warranty terms, prices, and risk parameters.

Suggested Citation

  • Peter H. Ritchken & Charles S. Tapiero, 1986. "Warranty design under buyer and seller risk aversion," Naval Research Logistics Quarterly, John Wiley & Sons, vol. 33(4), pages 657-671, November.
    • Handle: RePEc:wly:navlog:v:33:y:1986:i:4:p:657-671
    DOI: 10.1002/nav.3800330410
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    Cited by:

    1. 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).
    2. Herbert Moskowitz & Young Hak Chun, 1994. "A poisson regression model for two‐attribute warranty policies," Naval Research Logistics (NRL), John Wiley & Sons, vol. 41(3), pages 355-376, April.
    3. Charles S. Tapiero & Morton J. Posner, 1988. "Warranty reserving," Naval Research Logistics (NRL), John Wiley & Sons, vol. 35(4), pages 473-479, August.

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