How long should a producer offer full refund?

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. The conditions under which this time for full refund is found is based on maximizing the market share of the product subject to the constraint that the proportional increase in expected warranty costs, when compared to a linear pro-rata plan, does not exceed a chosen value.