Warranty design under buyer and seller risk aversion

Peter H. Ritchken and Charles S. Tapiero

Naval Research Logistics Quarterly, 1986, vol. 33, issue 4, 657-671

Abstract: This paper provides a framework in which warranty policies for non‐repairable items can be evaluated according to risk preferences of both buyers and sellers. In particular, a warranty price schedule is established such that sellers are indifferent among the policies. Given this schedule, a buyer's response is expressed by selecting the price‐warranty combination that minimizes disutility. Within this framework, a warranty can be viewed as an instrumet of risk management that can induce more sales and greater profitability. For given utility functions, analytical results for the development of a price schedule are developed. Numerical results illustrate the substitution effects between warranty terms, prices, and risk parameters.

Date: 1986
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Persistent link: https://EconPapers.repec.org/RePEc:wly:navlog:v:33:y:1986:i:4:p:657-671

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