Market Regulation of Voluntary Add-on Contracts

Christian Michel

VfS Annual Conference 2016 (Augsburg): Demographic Change from Verein für Socialpolitik / German Economic Association

Abstract: This paper analyzes contract choices and the effectiveness of consumer protection policies when firms can offer voluntary add-on insurance for their products at the point of sale. We develop a model in which a base product can be sold together with a voluntary extended warranty contract that insures consumers against the risk of product breakdown. Some consumers do not pay attention to extended warranties before making a base product choice, but they overestimate the value of such warranties at the point of sale. Under retail competition, if the resulting extended warranty profits are sufficiently high, a no-arbitrage condition prevents the full profits from being redistributed to consumers via a lower base product price. Inducing competition in the extended warranty market weakly increases consumer welfare and weakly outperforms a minimum warranty standard, which can even reduce consumer surplus. The results of the paper are consistent with the effects of recent changes regarding extended warranty regulation by UK legislators.

JEL-codes: D18 D21 L13 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc16:145892

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