IDEAS home Printed from https://ideas.repec.org/a/ijb/journl/v5y2006i1p1-16.html
   My bibliography  Save this article

A Simple Model of Reliability, Warranties, and Price-Capping

Author

Listed:
  • Donald A. R. George

    (Management School & Economics, University of Edinburgh, U.K.)

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.

Suggested Citation

  • Donald A. R. George, 2006. "A Simple Model of Reliability, Warranties, and Price-Capping," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 5(1), pages 1-16, April.
  • Handle: RePEc:ijb:journl:v:5:y:2006:i:1:p:1-16
    as

    Download full text from publisher

    File URL: https://ijbe.fcu.edu.tw/assets/ijbe/past_issue/No.05-1/pdf/vol_5-1-1.pdf
    Download Restriction: no

    File URL: https://ijbe.fcu.edu.tw/assets/ijbe/past_issue/No.05-1/abstract/01.html
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Matthews, Steven & Moore, John, 1987. "Monopoly Provision of Quality and Warranties: An Exploration in the Theory of Multidimensional Screening," Econometrica, Econometric Society, vol. 55(2), pages 441-467, March.
    2. Milgrom, Paul & Roberts, John, 1982. "Limit Pricing and Entry under Incomplete Information: An Equilibrium Analysis," Econometrica, Econometric Society, vol. 50(2), pages 443-459, March.
    3. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-483, December.
    4. Milgrom, Paul & Roberts, John, 1986. "Price and Advertising Signals of Product Quality," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 796-821, August.
    5. Fraser, Rob, 1994. "Price, quality and regulation : An analysis of price capping and the reliability of electricity supply," Energy Economics, Elsevier, vol. 16(3), pages 175-183, July.
    6. Matsukawa, Isamu & Fujii, Yoshifumi, 1994. "Customer Preferences for Reliable Power Supply: Using Data on Actual Choices of Back-Up Equipment," The Review of Economics and Statistics, MIT Press, vol. 76(3), pages 434-446, August.
    7. Carl Shapiro, 1983. "Premiums for High Quality Products as Returns to Reputations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 98(4), pages 659-679.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. George, Donald A R, 2012. "Technical progress and product reliability under competition and monopoly," SIRE Discussion Papers 2012-23, Scottish Institute for Research in Economics (SIRE).
    2. George, Donald A. R., 2000. "A model of endogenous quality management," Journal of Economics and Business, Elsevier, vol. 52(3), pages 289-304.
    3. Donald A. R. George, 2011. "Technical progress and product reliability under competition and monopoly," Edinburgh School of Economics Discussion Paper Series 211, Edinburgh School of Economics, University of Edinburgh.
    4. Donald A R George, 2014. "Segmentation in Consumer Durables Markets," International Journal of Business Administration, International Journal of Business Administration, Sciedu Press, vol. 5(2), pages 13-22, March.
    5. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899.
    6. Shiou Shieh, 1996. "Price and Money‐Back Guarantees as Signals of Product Quality," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 5(3), pages 361-377, September.
    7. Daniel W. Elfenbein & Raymond Fisman & Brian McManus, 2015. "Market Structure, Reputation, and the Value of Quality Certification," American Economic Journal: Microeconomics, American Economic Association, vol. 7(4), pages 83-108, November.
    8. Nancy A. Lutz, 1988. "Warranties as Signals Under Consumer Moral Hazard," Cowles Foundation Discussion Papers 867, Cowles Foundation for Research in Economics, Yale University.
    9. Kaya, Ayça, 2009. "Repeated signaling games," Games and Economic Behavior, Elsevier, vol. 66(2), pages 841-854, July.
    10. Auriol, Emmanuelle & Schilizzi, Steven G.M., 2015. "Quality signaling through certification in developing countries," Journal of Development Economics, Elsevier, vol. 116(C), pages 105-121.
    11. Donald George, 1997. "Production, Quality and Markets," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 4(1), pages 21-31.
    12. Daughety, Andrew F & Reinganum, Jennifer F, 1995. "Product Safety: Liability, R&D, and Signaling," American Economic Review, American Economic Association, vol. 85(5), pages 1187-1206, December.
    13. Villas-Boas, Sofia B, 2020. "Reduced Form Evidence on Belief Updating Under Asymmetric Information," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt08c456vk, Department of Agricultural & Resource Economics, UC Berkeley.
    14. Vaccari, Federico, 2023. "Competition in costly talk," Journal of Economic Theory, Elsevier, vol. 213(C).
    15. Matthew Plosser & João A. C. Santos, 2014. "Banks' incentives and the quality of internal risk models," Staff Reports 704, Federal Reserve Bank of New York.
    16. Srihari Govindan & Robert Wilson, 2009. "On Forward Induction," Econometrica, Econometric Society, vol. 77(1), pages 1-28, January.
    17. Dominiak, Adam & Lee, Dongwoo, 2023. "Testing rational hypotheses in signaling games," European Economic Review, Elsevier, vol. 160(C).
    18. Eric Rasmusen, 2008. "Quality-Ensuring Profits," Working Papers 2008-10, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    19. Junhong Chu & Pradeep K. Chintagunta, 2009. "Quantifying the Economic Value of Warranties in the U.S. Server Market," Marketing Science, INFORMS, vol. 28(1), pages 99-121, 01-02.
    20. W. Bentley MacLeod, 2006. "Reputations, Relationships and the Enforcement of Incomplete Contracts," CESifo Working Paper Series 1730, CESifo.

    More about this item

    Keywords

    reliability; warranties; price-capping;
    All these keywords.

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ijb:journl:v:5:y:2006:i:1:p:1-16. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Szu-Hsien Ho (email available below). General contact details of provider: https://edirc.repec.org/data/cbfcutw.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.