Competition issues related to extended warranties.

Abstract

The aim of this study is to investigate extended warranties, prices and profits in a model with two competing retailers selling two substitute goods and one manufacturer. Our model comprises four cases that differ from one another depending on the identity of the extended warranty (EW) provider. i) Case N, where neither the retailers, nor the manufacturer provide extended-warranties (EWs), the latter being supplied by an open market that is fully competitive. ii) Case R, in which the EW providers are the retailers. iii) Case M, in which the manufacturer is the EW provider and finally case RM, in which the retailers sell the manufacturer’s EWs. We find that in case R the product price is lower compared to that in any of the other cases. Also the chain profits are higher in that case. The full price is higher in cases R, M and RM than the full price in the competitive EW market (case N). Another interesting result is that as product differentiation decreases, extended warranty price decreases too.