Determination of Time Period for Full Refund in a Warranty

Abstract

Abstract Almost all consumer products are associated with a certain warranty time as stipulated by the manufacturer. Such a statement of warranty provides the buyer with an assurance on the performance of the product in the stated period. On the other hand, manufacturers use warranties for promotional and protectional purposes. In most cases, the type of warranty offered is linear pro-rata. This means that the rebate offered to the customer decreases linearly, from the price of the product to zero, as the time of product failure varies between zero and the warranty time. However, in some products, better promotional characteristics are observed if a full refund of the product price is made up to a certain period and linear pro-rata takes place thereafter. The purpose of this paper is to determine the time up to which a full refund is to be made given an allowable proportional increase in the expected rebate, compared to a linear pro-rata plan, that is acceptable to the manufacturer. By providing full refu...