Retail Strategies for Extended Warranty Sales and Impact on Manufacturer Base Warranties

Abstract

ABSTRACTConsider two competing manufacturers selling their products through the same retailer. If this retailer derives profits from extended warranty sales, the manufacturers face a dilemma in setting their base warranties. Although they have incentive to increase their warranties to make their products attractive to consumers, the retailer might prefer selling lower‐warranty products to enhance extended warranties sales. We develop a stylized model to determine and analyze optimal manufacturer and retailer strategies in this setting. Consistent with the ongoing decline in warranties for products that are sold through independent retailers, we show that these interactions exert downward pressure on manufacturer warranties. Rather than pitching the extended warranty at the checkout after customers have selected a certain product, we find that retailers can often benefit from inducing simultaneous consideration of product and extended warranty characteristics, for example by posting extended warranty information right on the product shelf.