Warranty mechanism for pre-owned tech products: Collaboration between E-tailers and online warranty provider

Abstract

In the fast-growing online second-hand electronics market, the warranty strategies provided by independent third-party warranty providers (3WP), such as SquareTrade, rely fully on the product information provided by Internet retailers (e-tailers). For the used electronic products with high quality uncertainty, the accuracy of product quality information depends on the product inspection efforts exerted by e-tailers, and the accuracy of the inspection affects the warranty strategy and 3WP's returns. In order to effectively encourage e-tailers to provide more accurate product quality information, this research first analyses the relationship between the expected repair cost of 3WP and the accuracy of quality information of the used products. Since e-tailers’ efforts to examine the products are unknown to the 3WP, we propose a moral hazard model to describe the relationship between the 3WP and e-tailers. We also develop an optimal profit-sharing plan of 3WP to motivate the e-tailers to improve the inspection efforts to more truthfully disclose the product's status. Subsequently, we conduct a numerical example and sensitivity analysis. We find that the proposed warranty mechanism provides a more rational and practicable warranty policy, improves the operation of the Internet-based second-hand commodity market, and enhances the sustainability of 3WP.