Being a provider or a reseller? The design strategies of extended warranties for competing retailers

Abstract

This paper investigates how competing retailers design their extended warranties to gain more profits. The two retailers are involved in a Cournot competition. Meanwhile, both retailers prefer to gain more incremental profits from the extended warranties they sell. As a result, each retailer is driven to figure out the best strategy design of related extended warranty. Both two retailers have two options on designing the extended warranties: to be a provider or to be a reseller. To be a provider means to provide the extended warranty directly and incur the repair costs of product failures. To be a reseller means to resell the extended warranty polices of a third party (e.g., an independent insurance company). From the retailer's prospect, to be a provider is always the dominant strategy for each retailer, which implies that both two competing retailers providing the extended warranty directly arises as equilibrium. Such equilibrium makes both retailers' profits improved only when the reservation price of the product is large enough. From the total system's prospect, the third party providing the extended warranty prefers to conduct the coordination contract rather than wholesale-price contract to manage the extended warranty channel. Moreover, only when the product market competition is not intense as well as reservation price of the product is large enough, the equilibrium outcome in which both two retailers providing extended warranties results in Pareto improved in total system's profit. This research helps to explain the observed industry practices, and it offers useful guidelines for competing retailers to design their extended warranties.