Design of extended warranty service in a dual supply channel

Abstract

Studies have shown that the extended warranty takes a significant role in promoting products sales and improving customer satisfaction on after-sales service quality of products. This paper aims to study how to design service strategies of extended warranty in a dual supply channel by taking into account customer channel preferences. Considering a supply chain with a single manufacturer and a retailer, we build three game-theoretic models to study the problem of optimal extended warranty design. In these models, the service of extended warranty could be provided by either the manufacturer or the retailer. The extended warranty provider decides the warranty service strategies in its best interests. Both the analytical methods and numerical experiments are used to compare the retail price, the profit of the supply chain and the customer-perceived service quality of the extended warranty (also called service utility). The results show that the product price tends to decline as the extended warranty length increase. Also, a supply chain will obtain a high profit no matter which party provides the extended warranty, but the corresponding service quality of customer perception is not necessarily maximised. In addition, if customers have higher preferences to the extended warranty provider’s sales channel, the provider should offer a higher perceived service quality of extended warranty.