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

Author

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  • Bian, Yiwen
  • Xie, Jiazheng
  • Archibald, Thomas W.
  • Sun, Yanhong

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 or EWT? (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.

Suggested Citation

  • Bian, Yiwen & Xie, Jiazheng & Archibald, Thomas W. & Sun, Yanhong, 2019. "Optimal extended warranty strategy: Offering trade-in service or not?," European Journal of Operational Research, Elsevier, vol. 278(1), pages 240-254.
    • Handle: RePEc:eee:ejores:v:278:y:2019:i:1:p:240-254
    DOI: 10.1016/j.ejor.2019.04.015
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    7. Hu, Shu & Tang, Yanli, 2024. "Impact of product sharing and heterogeneous consumers on manufacturers offering trade-in programs," Omega, Elsevier, vol. 122(C).
    8. Xuemei Zhang & Jiawei Hu & Suqin Sun & Guohu Qi, 2022. "Extended Warranty Strategy and Its Environment Impact of Remanufactured Supply Chain," IJERPH, MDPI, vol. 19(3), pages 1-25, January.
    9. Wang, Xiaolin & Zhao, Xiujie & Liu, Bin, 2020. "Design and pricing of extended warranty menus based on the multinomial logit choice model," European Journal of Operational Research, Elsevier, vol. 287(1), pages 237-250.
    10. Cao, Kaiying & Su, Yunyi & Han, Guoxin & Choi, Tsan-Ming, 2022. "Is it wise to offer rebates for unused extended warranties under trade-in programs in supply chains?," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 167(C).
    11. Huang, Yeu-Shiang & Fang, Chih-Chiang & Lu, Chang-Ming & (Bill) Tseng, Tzu-Liang, 2022. "Optimal Warranty Policy for Consumer Electronics with Dependent Competing Failure Processes," Reliability Engineering and System Safety, Elsevier, vol. 222(C).
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    19. Sezgin Çağlar Aksezer, 2023. "Sustainability via Extended Warranty Contracts: Design for a Consumer Electronics Retailer," Sustainability, MDPI, vol. 16(1), pages 1-11, December.
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    21. Li, Sijie & Zheng, Bin & Jia, Dongfeng, 2024. "Optimal decisions for hybrid manufacturing and remanufacturing with trade-in program and carbon tax," Omega, Elsevier, vol. 124(C).
    22. Xingchen Li & Jinxing Xie & Tingting Li, 2023. "Trade-in strategy for durable products in the presence of a peer-to-peer second-hand marketplace," Annals of Operations Research, Springer, vol. 326(1), pages 223-260, July.

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