After-sales service and warranty decisions of a durable goods manufacturer

We study a monopolistic durable goods manufacturer that also provides a base warranty and after-sales services to her customers through a designated retailer. The customers evaluate the total cost of ownership of the product when they make the purchasing decision. However, they can foresee the future costs only to a certain extent. In this setting, we find the manufacturer’s product price decision followed by the spare parts wholesale and retail price decisions made by the manufacturer and the retailer, respectively. As a benchmark, we study the centralized system where the manufacturer and the retailer are integrated. We also study an alternative model; i.e., a third party model, where the manufacturer is not active in the after-sales business and does not offer a warranty, and these services are carried out by an independent retailer. We find that when the manufacturer controls her after-sales channel, she gives away the product for free and extracts all her profit from the after-sales services. In fact, the extent of the warranty coverage is irrelevant, and does not affect the manufacturer’s profit or the consumer surplus. Especially when customers are myopic with very limited foresight into future costs, the manufacturer will prefer to control her after-sales market. From the customer perspective, however, the third party model tends to be the better choice.