 Market regulation of voluntary add-on contractsChristian Michel International Journal of Industrial Organization, 2017, vol. 54, issue C, 239-268 Abstract: This paper analyzes contract choices and the effectiveness of consumer protection policies when firms can offer voluntary add-on insurance for their products. 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 base product choices, but overestimate the value of such warranties at the point of sale. Under retail competition, the consumers’ option to buy multiple base products can endogenously create a base price floor that may prevent firms from redistributing the full warranty profits via loss-leadership. Inducing competition in the warranty market weakly increases consumer welfare and weakly outperforms a minimum warranty standard, which can even reduce consumer surplus. The results are consistent with the effects of recent changes regarding extended warranty regulation by UK legislators. Keywords: Add-on insurance; Extended warranty regulation; Endogenous price floor; Consumer protection policies; Consumer naivete (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:indorg:v:54:y:2017:i:c:p:239-268 DOI: 10.1016/j.ijindorg.2017.07.001 Access Statistics for this article International Journal of Industrial Organization is currently edited by P. Bajari, B. Caillaud and N. Gandal More articles in International Journal of Industrial Organization from Elsevier |
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