Extended warranty strategies for online shopping supply chain with competing suppliers considering component reliability

Abstract

This article presents the issue of extended warranty and management strategies in a three-echelon competing online shopping supply chain with price- and base warranty period-dependent demand. We employ game theory to develop decision models to explore the interactions between component suppliers and the manufacturer, as well as competition between two component suppliers. Products and extended warranty are sold by an online store, which is the leader in the Stackelberg game. Two scenarios are considered: either the manufacturer offers a prepaid extended warranty to customers or doses not. In each scenario, base warranties are assumed to be bundled with products. Our results show that when the manufacturer’s repair costs change in a proper range, providing extended warranty can benefit both the manufacturer and the online store; otherwise, the manufacturer has no incentive to offer the extended warranty. Reducing repair costs, improving component reliability, or shortening the base warranty period allows the manufacturer to realize significantly better value of the extended warranty. High component reliability benefits both the manufacturer and the online store, with the manufacturer reaping more benefit. Extending the length of the base warranty adversely affects profit of the manufacturer and the value of the extended warranty.