Optimal price and warranty decision for durable products in a competitive duopoly market

Abstract

In recent years, product warranties have become a promotional or competing instrument for the manufacturer. Although providing a warranty will benefit both transaction sides, it is impractical for the manufacturer to provide an unlimited warranty to monopolize the market since the related operating costs will eventually exceed the profits. Accordingly, to provide a proper warranty is a crucial issue for the manufacturer. However, the related studies overly focused on the issue of price competition. Actually, with regard to durable products, market competition exists in price and post-sale service. Accordingly, price and warranty should be equally important when manufacturers make their integrated marketing strategies. A rational non-cooperative game model will be proposed in this study. A duopoly market is considered, and the two manufacturers will pay the royalty to obtain critical techniques and parts from a technical supplier to produce and sell highly substitutable products to a local market. The study indicates as follows: once the duopoly market equilibrium is reached, no single manufacturer can increase its profits by means of raising its price or extending its warranty term since the two manufacturers’ decisions always react to each other. Moreover, the manufacturers cannot fully transfer the increment of the royalty to customers by means of raising price. In addition, increasing demand's competitive intensity with respect to warranty will amplify a manufacturer's warranty elasticity if its warranty term is shorter than that of its rival. Due to the practicality of this issue, more managerial insights and suggestions are included in this study.