Is it wise to offer rebates for unused extended warranties under trade-in programs in supply chains?

Abstract

Nowadays, more and more firms are providing trade-in and “(product) extended warranty” (EW) services to attract new and old customers and boost new product sales. In practice, firms have two trade-in strategies for replacement consumers who own an unused EW, namely (i) do not offer another rebate for an unused EW (Model TT), and (ii) offer a rebate for an unused EW (Model TE). To explore which trade-in strategy for an unused EW is better, we develop theoretical models to study the optimal product pricing, EW pricing, and rebate decisions for a used product. The results show that if the percentage of replacement consumers who own unused EW and the extra operational cost of providing a rebate for an unused EW are both sufficiently large, TT is the better choice for the firm; otherwise, the firm should choose TE. Interestingly, if the extra operational cost of providing a rebate for an unused EW is relatively large, the total trade-in rebates under TE is lower than the trade-in rebate under TT. To check the robustness of our basic model and generate some new insights, we consider the following five extensions: (i) TT has a negative effect on consumers, (ii) the repair cost is linear, (iii) the unused EW has different remaining time, (iv) in the “supply chain context”, (v) the used products have different durability (depreciation). We find that our main insights and conclusion regarding the optimal unused EW trade-in strategy remain valid.