Research on warranties for different components in an open vertically integrated supply chain

Abstract

How to set appropriate warranty periods for different components is a common problem for manufacturers who produce end products when pricing. This study investigates a pricing game between a vertically integrated manufacturer and an external end-product manufacturer with the vertically integrated manufacturer supplying the key component of the end product to the external end-product manufacturer and competing with the external end-product manufacturer in the terminal market as a leader. The two manufacturers make decisions on the warranty period for the key component and the end product without the key component respectively under a two-component structure. We assume that customers perceive product quality through warranty periods of different components and brand reputations of the manufacturers. The result shows that the manufacturer with a higher brand reputation has an incentive to offer a longer warranty period. However, due to the impact of corresponding warranty costs, there exist intervals of brand reputation in which the manufacturer provides a shorter warranty period for the key component or the end product without the key component than the competitor even though the brand reputation of this manufacturer is higher. The best choice for the vertically integrated manufacturer is to increase the key component wholesale price but keep the end product sale price unchanged when the brand reputation of the external end-product manufacturer gets stronger. Interestingly, the higher the brand reputation of the external end-product manufacturer, the greater the profit of the vertically integrated manufacturer. Related numerical examples and managerial insights are presented in this paper.