A warranty model for remanufactured products

Abstract

Consumers are often unable to determine or judge the quality of the product before purchase. To alleviate this uncertainty in the minds of consumers, manufacturers often insure their customers against this risk of product breakdown by bundling a manufacturer’s warranty in their products at the time of sale. Due to the uncertain factors of the remanufacturing system, the role of warranty is especially important. Consumers often view remanufactured products as inferior and are less willing to pay for them. This article studies the warranty policy and its effect on consumer behavior from the perspective of consumers. We incorporate the manufactures’ warranty service and consumer heterogeneity in the model and develop three marketing settings to examine the impact of warranty for the manufacturers’ profit. The results show that those employed warranty associated with their products can command higher prices for their products in the marketplace, and accordingly can enhance the manufacturer’s profit. The numerical analysis helps provide managers with insight on the base warranty and its implication.