Modeling the Extended Warranty: A Managerial Focus

Abstract

We provide a model of an extended warranty. To maximize profit, a producer always wants to sell with some type of warranty as opposed to selling with no warranty. The extended warranty is more likely to be provided as the consumer becomes more patient, as the producer becomes impatient, or if the likelihood of product failure does not increase too much in the extended period. We show that there is a separating equilibrium in which the high quality producers sell with warranties and the low quality producers sell without warranties. We discuss the implications of warranty management in a government.