Warranty strategy in a supply chain when two retailer’s extended warranties bundled with the products

Abstract

We in this paper examine warranty strategy in a two-stage supply chain consisting of a manufacturer and two competing retailers. The manufacturer produces two substitute products and markets them through the two retailers to a group of consumers, respectively. For each type of products, the manufacturer’s base warranty and a retailer’s extended warranty are bundled with the product. We use game theoretic models to explore the interactions between the two types of warranties and the competition between the retailers. For this purpose, two scenarios are considered: no retailer and both the two retailers providing the extended warranties, respectively. In each scenario, the manufacturer’s base warranties are assumed to be offered. Our results show that when the retailers offer their extended warranties, the manufacturer has no incentive to offer the base warranties; otherwise, the manufacturer has to provide the base warranties. The competition between retailers in terms of the product substitutability has no impact on warranty decisions, but affects all players’ profits in the supply chain. The manufacturer can provide a longer warranty length and higher customer welfare to a customer than the retailers do, if it is more efficient than the retailers in warranty cost-efficiency, and vice versa.