Optimal extended warranty strategy: uniform or nonuniform pricing?

Abstract

AbstractManufacturers are increasingly selling extended warranties to achieve high profitability. An important question is to sell the traditional or flexible extended warranty (TEW vs. FEW). TEW is sold at the time of product sales with a uniform price, while FEW can be sold at the time of product sales (the first point) or at the end of base warranty (the second point) with nonuniform prices. When selling FEW, manufacturers need to decide whether to preannounce the difference between the first‐point and second‐point warranty prices. To address such challenging issues, we develop theoretical models regarding selling TEW or FEW and find that neither of the two warranty services is always superior to the other. Particularly, FEW outperforms TEW when the manufacturer's cost efficiency of warranty is relatively high and/or the total warranty duration is relatively short. Interestingly, when selling FEW, it is not always better off concealing the price difference information, which is counterintuitive.