Optimal extended warranty strategy for a two-sided platform under agency selling

Abstract

Platforms are realizing that providing extended warranties not only achieves high profitability but also improves consumer satisfaction. In the current marketplace, extended warranties are often sold along with the products and can be provided by platforms, manufacturers, or both. How platforms and manufacturers develop efficient extended warranty strategies and the interaction between extended warranty strategies are critical questions for decision-makers. This paper proposes a three-stage Stackelberg game model to analyze the decision procedure from the perspective of a platform. Results show that the platform benefits from providing extended warranties in scenarios of large market size, or a moderate market size and a high commission rate; otherwise, the platform should not provide extended warranties. Furthermore, providing extended warranties surprisingly does not always increase product demand in a monopoly market, despite the extended warranty having the market expansion effect. Finally, the platform and the manufacturer achieve a win-win outcome by simultaneously providing extended warranties only when the potential market size is sufficiently large; when the potential market size is quite small, neither the platform nor the manufacturer provides extended warranties; otherwise, only one of the two warrantors provides extended warranties. These results give platforms and manufacturers suggestions for extended warranty strategies design and pricing decisions.