A Simple Model of Reliability, Warranties and Price-Capping

Donald George

Research output: Contribution to journalArticlepeer-review

Abstract

The paper presents a model of reliability which captures the process by which reliability is actually determined more accurately than the conventional analysis. In contrast to that conventional analysis, which is based on the characteristics approach, the model of this paper defines reliability as the objective probability of product failure, not as a characteristic of individual goods. Reliability, thus defined, is treated as a choice variable of the firm. The resulting model is applied to a monopolist subject to a price cap. The monopolist can vary reliability and the terms of a warranty or compensation deal in response to price-capping. The monopoly outcome, price-capped monopoly outcome, and Pareto-efficient outcome are compared. The model provides a theoretical explanation of some empirical results in the literature on electricity regulation.
Original languageEnglish
Pages (from-to)1-16
Number of pages16
JournalInternational Journal of Business and Economics
Volume5
Issue number1
Publication statusPublished - Apr 2006

Keywords

  • reliability
  • warranties
  • price-capping

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