Warranty pricing with consumer learning

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review

8 Scopus Citations
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Related Research Unit(s)

Detail(s)

Original languageEnglish
Pages (from-to)596-610
Journal / PublicationEuropean Journal of Operational Research
Volume263
Issue number2
Online published13 Jun 2017
Publication statusPublished - 1 Dec 2017

Abstract

We consider a problem in which a firm dynamically prices a product and its warranty service over time. Consumers can learn about the reliability of products based on warranty prices. A firm’s optimal product and warranty pricing policies are characterized. We find that a warranty should be priced lower than the marginal warranty service cost, which implies that warranty sales will not generate profits directly. However, offering a modest warranty still benefits the firm’s overall profits. We also show that consumers’ beliefs and the firm’s warranty policy converge in the long run. In a steady state, either a fraction of consumers will purchase a warranty or no consumer will purchase a warranty. Comparative statics analysis is conducted to show how factors such as a firm’s warranty service cost, consumers’ learning speed, and the heterogeneity of consumers’ handling costs determine consumers’ beliefs, the firm’s warranty policy and profitability in a steady state. Lastly, we note that a firm benefits from consumer learning by hiding the information about the true product reliability only when the true product failure rate is relatively high.

Research Area(s)

  • Consumer learning, Pricing, Revenue management, Warranty management

Citation Format(s)

Warranty pricing with consumer learning. / Lei, Yong; Liu, Qian; Shum, Stephen.

In: European Journal of Operational Research, Vol. 263, No. 2, 01.12.2017, p. 596-610.

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalNot applicablepeer-review