How Does a Retailer's Service Plan Affect a Manufacturer's Warranty?

A service plan is a type of optional warranty beyond manufacturers' base warranties that retailers offer to consumers. In this paper, we examine how a service plan affects the role played by a manufacturer's base warranty. Analysis shows that when consumers can assess product quality (i.e....

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Bibliographic Details
Published in:Management science 2011-04, Vol.57 (4), p.727-740
Main Authors: Jiang, Bo, Zhang, Xubing
Format: Article
Language:English
Subjects:
Applied sciences
Cost functions
Customer service
Distribution channels
Exact sciences and technology
Extended warranties
Firm modelling
Game theory
Inventory control, production control. Distribution
Management
Management science
Manufacturers
Manufacturing
Manufacturing industry
Marketing
Operational research and scientific management
Operational research. Management science
Product quality
Products
Reliability theory. Replacement problems
Retail industry
Retail stores
Retail trade
Retailing
Risk aversion
Service plan
service plans
Services
signaling
Studies
Sumer
War planning
Warranties
Warranty
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Summary:A service plan is a type of optional warranty beyond manufacturers' base warranties that retailers offer to consumers. In this paper, we examine how a service plan affects the role played by a manufacturer's base warranty. Analysis shows that when consumers can assess product quality (i.e., the probability of product failure), the manufacturer's warranty is negatively affected by the presence of a service plan. In the presence of such a plan, a base warranty is offered only when the manufacturer is very cost-efficient in providing a warranty relative to the retailer. In this case, although the double-marginalization problem is aggravated, offering a (limited) base warranty reduces the total warranty cost in the channel and provokes the retailer into enlarging the service plan coverage. When consumers cannot assess product quality, a high-quality manufacturer is motivated to offer a base warranty to signal its quality. In the presence of a service plan, however, a very cost-efficient manufacturer is discouraged from doing so. This paper was accepted by Preyas Desai, marketing.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.1110.1308