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

Bo Jiang () and Xubing Zhang ()
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Bo Jiang: Faculty of Business Administration, The Chinese University of Hong Kong, New Territories, Hong Kong
Xubing Zhang: Faculty of Business, The Hong Kong Polytechnic University, Kowloon, Hong Kong

Management Science, 2011, vol. 57, issue 4, 727-740

Abstract: 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.

Keywords: service plans; warranty; signaling; distribution channels; game theory (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:57:y:2011:i:4:p:727-740

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