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The Effect of Product Misperception on Economic Outcomes: Evidence from the Extended Warranty Market

Jose Miguel Abito and Yuval Salant

Review of Economic Studies, 2019, vol. 86, issue 6, 2285-2318

Abstract: Panel and experimental data are used to analyse the economic outcomes in the extended warranty market. We establish that the strong demand and high profits in this market are driven by consumers distorting the failure probability of the insured product, rather than standard risk aversion or sellers’ market power. Providing information to consumers about failure probabilities significantly reduces their willingness to pay for warranties, indicating the important role of information, or lack of, in driving consumers’ purchase behaviour. Such information provision is shown to be more effective in enhancing consumer welfare than additional market competition.

Keywords: Probability overestimation; Extended warranty; Risk preferences; Consumer protection (search for similar items in EconPapers)
JEL-codes: D03 D18 D60 D81 G02 G22 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:oup:restud:v:86:y:2019:i:6:p:2285-2318.