Optimal Warranty Research Articles

A poisson regression model for two-attribute warranty policies

We discuss the two-attribute warranty policy in which two types of warranty characteristics, such as product age and mileage in the y-year-m-mile protection plan in the automobile industry, are employed simultaneously as criteria in determining the warranty eligibility of a failed product. Based on the Poisson regression model and von Neumann-Morgenstern expected utility theory, we develop two kinds of two-attribute warranty policies: a fixed two-attribute warranty policy in which all customers are offered the same warranty plan, and a flexible two-attribute warranty policy in which customers are permitted to choose any warranty plan among the numerous plans furnished by the producer. A numerical example is presented to illustrate the procedure for determining the optimal warranty price in the fixed two-attribute warranty model and for generating a set of warranty plans for the same warranty price in the flexible warranty model. It appears desirable from both the producers' and consumers' viewpoints to convert the classical single-attribute warranty policy into a fixed two-attribute policy or, even further, into a flexible two-attribute policy. © 1994 John Wiley & Sons. Inc.

Product Warranties and Double Moral Hazard

This article explores a model of warranties in which moral hazard problems play a key role. The goal is to understand the important characteristics of warranties, including their provision of incomplete insurance and the relationship between product quality and coverage. We analyze a model in which buyers and sellers take actions that affect a product's performance. Since these actions are not cooperatively determined, an incentives problem arises. We characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality.