An approach for determination of warranty length

Abstract

The use of product warranties as a competitive marketing variable has increased substantially during the past decade. Warranty length is often the most visible and marketed warranty element. However, the published literature offers no approach to aid determination of warranty length. This paper treats product warranty as a marketing variable and focuses on aiding decisions on what warranty length to offer. Results on warranty length are derived for three generic warranty types, given information on exogenous factors such as warranty and price elasticities, costs, and product failure rates. Short- and long-run decision-making perspectives are contrasted. Managerial use of the results is illustrated through econometric estimation based on analysis of automobile data. Warranty elasticity in our application is estimated to be 0.143.