The Impact of Extended Warranty on Base Warranty: A Game Approach

Abstract

Extended warranty is a type of optional service beyond the base warranty. It encourages the demands of risk-averse customers. However, it remains unclear to us that how the extended warranty affects the base warranty, as well as the profits of the manufacturers and the retailers. This paper focuses on two scenarios: the manufacturer offers only the base warranty, or an extended service plan (base warranty plus an optional extended warranty), and explores the impacts of extended warranty on base warranty. Analyses show that the extended service plan could definitely benefit the manufacturer. However, counter-intuitively, it reduces the retailer's profits. A critical reason is that compared with base warranty, the extended service plan provides less profit margin for the retailer. Furthermore, it is interesting that base warranty faces downward pressure in the presence of an extended warranty.