Dynamic pricing of two-dimensional extended warranty considering the impacts of product price fluctuations and repair learning

Abstract

Product prices fluctuate dynamically with changes in market supply and demand. This poses a dilemma for dealers, that is, dealers need to establish a dynamic extended warranty (EW) pricing strategy based on the fluctuations in product prices to attract consumers. To address this challenging issue, we establish a dynamic integration model to derive optimal product prices and two-dimensional (2D) EW prices in a multistage dynamic market environment to maximize the dealer’s expected discounted profit during the product life cycle. In order to explore the dynamic influence mechanism between reliability engineering factors and market elements, this model combines the warranty cost model influenced by reliability related repair learning characteristics and the 2D EW demand model influenced by product price fluctuations. The model allows dealers to identify the relationships among various factors, including repair learning characteristic, production scale effect, product cost, EW cost in product reliability level, and fluctuating product demand and EW demand in market demand level, and more important, their effects, on the dealers’ profit. The necessary optimality conditions and case study are conducted for static and dynamic markets.