Optimal Warranty Policy for Consumer Electronics with Dependent Competing Failure Processes

Abstract

This study considers warranties for consumer electronics with multiple dependent competing failure processes, including minor, over-degradation and catastrophic failure. Furthermore, the two alternative warranty programs are investigated: (1) a long-range warranty at a fixed lump-sum price and (2) a monthly warranty plan that can be either extended for the next month by continuous purchasing or terminated at the end of the current month. A designed dynamic programming approach is employed to obtain optimal solutions for warranty programs. Moreover, consumers with different attitudes toward risk are taken in consideration, and sensitivity analyses are performed to investigate the effects that the related factors have on profit. Integrating all issues, the study proposes extended warranty programs of lump-sum or monthly payment to different risk attitudes consumers with different attitudes toward risk with consideration of multiple dependent competing failure processes. The results indicate that high repair and replacement costs favor the monthly warranty program for firms. In addition, when there are more risk averse consumers in a market, there will be fewer purchases of a monthly warranty program, and it would thus be more profitable for firms to offer the one year warranty program.