Monopoly Provision of Product Warranties
- Creators
- Tan, Guofu
Abstract
This article considers the problem of monopoly provision of product warranties when consumers are heterogeneous and when the probability of product malfunction depends on both the quality of the product and on the consumers' care. The optimal warranty contract is characterized to maximize the expected profit for the monopolistic seller. The properties of the optimal contract depend on the nature of the product. If the quality of the product is more important as a determinant of reliability than consumer care then standard results are obtained; that is, a positive correlation between warranties and reliability and between price and reliability are observed, and higher type buyers buy more expensive versions of the product with higher warranties. On the other hand, if consumer care is more important in increasing reliability, the results are exactly opposite; for example, there is a negative correlation between warranty coverage and reliability. Also, when consumer care is important, higher type buyers buy versions of the product with lower warranty and lower quality. Other features of the optimal warranty contract are also characterized in this paper.
Additional Information
Revised. Original dated to July 1988. Financial support from John Randolph Haynes and Dora Haynes Foundation Fellowship is gratefully acknowledged. An early version of this paper was presented at the 1988 Western Economic Association Meetings in Los Angeles, July 1 to 3. I would especially like to thank John Ledyard for motivation and very helpful comments. I would also like to thank Richard Boylan, Chuck Coleman, Thomas Gilligan, Alan Schwartz and the participants in the Caltech Social Science Seminar for discussions and comments. Suggestions from two referees are also acknowledged. Any remaining errors are solely my responsibility.Attached Files
Submitted - sswp678_-_revised.pdf
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Additional details
- Eprint ID
- 81192
- Resolver ID
- CaltechAUTHORS:20170906-133509554
- John Randolph Haynes and Dora Haynes Foundation
- Created
-
2017-09-06Created from EPrint's datestamp field
- Updated
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2019-10-03Created from EPrint's last_modified field
- Caltech groups
- Social Science Working Papers
- Series Name
- Social Science Working Paper
- Series Volume or Issue Number
- 678