Who is better off by selling extended warranties in the supply chain: the manufacturer, the retailer, or both?

Abstract

An extended warranty is an additional service in the market that manufacturers and retailers provide for their customers. In this study, we investigate the optimal extended warranty strategies in a supply chain with a single manufacturer and a single retailer, and consider two single-channel models (the retailer solely provides the service, and the manufacturer solely provides the service) and a dual-channel model (both the retailer and the manufacturer provide the service). Using an analytical model, we demonstrate the optimal pricing decisions for the manufacturer and the retailer under these models and compare the profits of the manufacturer, retailer and supply chain. We find that among the models, customers enjoy a lower extended warranty price with a mild condition when the manufacturer provides the extended warranty service. However, the total profits of the supply chain are usually larger when the retailer sells the extended warranty. Through numerical experiments, we further investigate the influence of customer preferences, and find that the total profits of the supply chain increase if more customers purchase extended warranties from the retailer in the dual-channel model.