The Profitability of Consumer Protection: Warranty Policy in the Auto Industry

Abstract

This study uses data collected in a detailed survey of Wisconsin buyers to analyze the failure of the American automobile industry to improve warranty protection. The present level of warranty performance apparently reflects a strategic choice, conscious or unconscious, to maintain continuing relationships with customers through a reliance on the proprietary control over the market, rather than through investments in goodwill assets. Three possible explanations for this choice are explored. The first explanation, that the development of goodwill assets is not profitable because there is no effective demand for better warranty protection, is examined and rejected. The second explanation, that the development of goodwill assets is not profitable because the costs of adequate warranty protection would be too great, is also examined and rejected. The third explanation, that decision making is biased against the development of goodwill assets because of exclusive reliance on short-term accounting systems, is supported by data obtained in the consumer survey and by data obtained through interviews with industry professionals. The methodology used in this study is intended to serve as a rough model for a goodwill accounting system.