Market share and warranty costs for renewable warranty programs

Abstract

A majority of consumer products is associated with some type of warranty. The nature and extent of the warranty affect the sales, market share, costs and profits of many businesses. A warranty can be defined as an assurance from a seller to a buyer that the product sold is guaranteed to perform satisfactorily up to certain length of time, which is the warranty period. In case of product failure within the warranty period, it is assumed that the seller will conform to a rebate policy. In this paper the rebate policy is selected to be linear pro-rata or lump sum. The paper investigates warranty programs that offer customers the option to renew warranty, after an initial period, for a certain premium. The effect of such programs on market share and warranty costs is explored.