Using performance-based warranties to influence consumer purchase decisions

Clay Koschnick and Joseph C. Hartman

The Engineering Economist, 2020, vol. 65, issue 1, 1-26

Abstract: Traditional warranty analysis focuses on the reliability of a product and offers warranty designs that compensate a consumer if the item fails. We introduce the concept of a performance-based warranty (PBW) that guarantees that a product will operate at or above some baseline level of performance, such as a minimum energy efficiency for an appliance. We illustrate how consumer behavior can change in the presence of a PBW and define the parameters for which a manufacturer may increase revenue. Finally, we present an algorithm to solve for the optimal PBW design given a consumer’s belief about the expected performance of the product.

Date: 2020
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DOI: 10.1080/0013791X.2019.1642430

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