Warranty service and screening model contract under asymmetric information

Abstract

This paper explores the retailer's optimal strategies and the manufacturer's warranty period decision from a three-stage game theoretic perspective. The market demand is related to the warranty period and the price of the product. The Stackelberg game is modeled with the retailer as the game leader. Assuming that the warranty cost is private information of the manufacture, the retailer uses a menu of two-part tariff contracts concluding a unit payment and a lump sum transfer payment to screen different types of manufacture. The purpose of the retailer is to giving the manufacturers incentive to choose the optimal warranty period by maximizing their own profit. The result shows that retailer gives more information rent to the higher quality manufacturer with the proportion of higher warranty cost manufacturer increasing. The manufacturer with lower warranty cost only gets his reservation profit.