EconPapers    
Economics at your fingertips  
 

Warranties as a device to extract rent from low-risk users of a product

David Hakes and Dongsoo Shin ()
Additional contact information
David Hakes: Department of Economics, University of Northern Iowa, Cedar Falls, IA 50614, USA, Postal: Department of Economics, University of Northern Iowa, Cedar Falls, IA 50614, USA

Managerial and Decision Economics, 2008, vol. 29, issue 1, 1-7

Abstract: We develop a simple model that provides a new rationale for why a monopolist should bundle its product with a warranty even when all parties are risk neutral. In our model, a risk-neutral monopolist faces two types of risk-neutral consumers-low-risk users that are unlikely to cause product failure and high-risk users that are more likely to cause product failure. We find that when the firm fails to provide a warranty, a low-risk user acquires a strictly positive rent by pretending to be a high-risk user and receiving a price discount. By imposing a warranty, however, the monopolist can increase the price to high-risk users, which in turn removes the incentive for a low-risk user to pretend to be a high-risk user, and the firm successfully extracts rent from the low-risk user. Copyright © 2007 John Wiley & Sons, Ltd.

Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://hdl.handle.net/10.1002/mde.1367 Link to full text; subscription required (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:mgtdec:v:29:y:2008:i:1:p:1-7

DOI: 10.1002/mde.1367

Access Statistics for this article

Managerial and Decision Economics is currently edited by Antony Dnes

More articles in Managerial and Decision Economics from John Wiley & Sons, Ltd.
Bibliographic data for series maintained by Wiley Content Delivery ().

 
Page updated 2021-06-09
Handle: RePEc:wly:mgtdec:v:29:y:2008:i:1:p:1-7