Edinburgh Research Explorer

Optimal extended warranty strategy: Offering trade-in service or not?

Research output: Contribution to journalArticle

Original languageEnglish
Pages (from-to)240-254
JournalEuropean Journal of Operational Research
Volume278
Issue number1
Early online date18 Apr 2019
DOIs
Publication statusPublished - 1 Oct 2019

Abstract

Retailers and manufacturers are increasingly selling extended warranties to obtain high profitability. In addition to the traditional extended warranty (EWR), that offers a free repair and replacement service, a new extended warranty (EWT) comes to the market, under which an additional trade-in service is provided during the warranty coverage. The service provider faces three important decisions: (1) Whether to offer EWR orEWT? (2) How to set the optimal selling prices of EWR and EWT? (3) When choosing to sell EWT, how to determine the optimal trade-in price? To address such challenging issues, we first develop two theoretical models regarding EWR and EWT for a retailer, and further consider the cases where a manufacturer sells the extended warranties and the upgraded product has different failure probabilities. The results show that EWT should never be offered at a higher price than EWR, and when the handling cost for used products is relatively low, EWT will outperform EWR. While the optimal EWR and EWT selling prices increase with the product failure probability, the optimal trade-in price decreases with it. Interestingly, the optimal trade-in discount is not always increasing or decreasing with the failure probability. Moreover, an earlier trade-in time is usually better for the service provider. Compared with the retailer, the manufacturer will always set a lower warranty selling price, but neither of them will always offer a lower trade-in price or discount. We also find that the upgraded product’s failure probability will affect the retailer’s optimal warranty strategy and profit.

    Research areas

  • supply chain management, extended warranty, trade in service, warranty selling price, trade in price

ID: 51347334