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Why Do Consumers Buy Extended Service Contracts?

Author

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  • Tao Chen
  • Ajay Kalra
  • Baohong Sun

Abstract

We examine purchases of extended service contracts, which are essentially insurance products, for electronic products in a retail setting. The primary insurance purchase determinants are perceived probability of loss, extent of loss, risk aversion, and amount of insurance premium. We examine how product characteristics (hedonic/utilitarian, manufacturer's warranty) and retailer actions (promotions, feature advertising) influence the purchase of extended service contracts. We also investigate the impact of consumer characteristics (income, gender, and prior usage) on these insurance purchase determinants. To test the predictions, we use revealed preferences from panel data of electronic purchases across several product categories. (c) 2009 by JOURNAL OF CONSUMER RESEARCH, Inc..

Suggested Citation

  • Tao Chen & Ajay Kalra & Baohong Sun, 2009. "Why Do Consumers Buy Extended Service Contracts?," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 36(4), pages 611-623, December.
    • Handle: RePEc:oup:jconrs:v:36:y:2009:i:4:p:611-623
    DOI: 10.1086/605298
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    Cited by:

    1. Kaiying Cao & Yunyi Su & Guoxin Han & Jia Wang, 2023. "Optimal maintenance service outsourcing strategy considering extended warranty service," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(2), pages 1344-1358, March.
    2. Michel, Christian, 2017. "Market regulation of voluntary add-on contracts," International Journal of Industrial Organization, Elsevier, vol. 54(C), pages 239-268.
    3. Suwelack, Thomas & Hogreve, Jens & Hoyer, Wayne D., 2011. "Understanding Money-Back Guarantees: Cognitive, Affective, and Behavioral Outcomes," Journal of Retailing, Elsevier, vol. 87(4), pages 462-478.
    4. Yusong Wang & David Bell, 2015. "Consumer store choice in Asian markets," Marketing Letters, Springer, vol. 26(3), pages 293-308, September.
    5. 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).
    6. Heiman, Amir & Just, David R. & McWilliams, Bruce P. & Zilberman, David, 2015. "A prospect theory approach to assessing changes in parameters of insurance contracts with an application to money-back guarantees," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 54(C), pages 105-117.
    7. Marieke Huysentruyt & Daniel Read, 2010. "How do people value extended warranties? Evidence from two field surveys," Journal of Risk and Uncertainty, Springer, vol. 40(3), pages 197-218, June.
    8. Markus Fels, 2020. "Mental Accounting, Access Motives, and Overinsurance," Scandinavian Journal of Economics, Wiley Blackwell, vol. 122(2), pages 675-701, April.
    9. Weisheng Deng, 2020. "Sustainable development: Impacts of consumers' risk aversion on remanufacturing model selection and environmental performance," Sustainable Development, John Wiley & Sons, Ltd., vol. 28(6), pages 1564-1574, November.
    10. Francesc Dilmé & Daniel Garrett, 2022. "A Dynamic Theory of Random Price Discounts," ECONtribute Discussion Papers Series 191, University of Bonn and University of Cologne, Germany.
    11. Pranav Jindal, 2015. "Risk Preferences and Demand Drivers of Extended Warranties," Marketing Science, INFORMS, vol. 34(1), pages 39-58, January.
    12. Itzhak Venezia, 2018. "Lecture Notes in Behavioral Finance," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 10751, December.
    13. Willem Boom, 2011. "Price Intransparency, Consumer Decision Making and European Consumer Law," Journal of Consumer Policy, Springer, vol. 34(3), pages 359-376, September.
    14. Jose A. Guajardo & Morris A. Cohen, 2018. "Service Differentiation and Operating Segments: A Framework and an Application to After-Sales Services," Manufacturing & Service Operations Management, INFORMS, vol. 20(3), pages 440-454, July.
    15. Christian Michel, 2018. "Contractual structures and consumer misperceptions," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 27(2), pages 188-205, June.
    16. Kock, Florian & Josiassen, Alexander & Assaf, A. George, 2019. "The xenophobic tourist," Annals of Tourism Research, Elsevier, vol. 74(C), pages 155-166.
    17. Alrawad, Mahmaod & Lutfi, Abdalwali & Alyatama, Sundus & Al Khattab, Adel & Alsoboa, Sliman S. & Almaiah, Mohammed Amin & Ramadan, Mujtaba Hashim & Arafa, Hussin Mostafa & Ahmed, Nazar Ali & Alsyouf, , 2023. "Assessing customers perception of online shopping risks: A structural equation modeling–based multigroup analysis," Journal of Retailing and Consumer Services, Elsevier, vol. 71(C).
    18. Robin Chark & Vincent Mak & A. V. Muthukrishnan, 2020. "The premium as informational cue in insurance decision making," Theory and Decision, Springer, vol. 88(3), pages 369-404, April.
    19. Zhang, Zhichao & Xu, Haiyan & Zhao, Yingxue & Liu, Zhi & Chen, Kebing, 2023. "Extended warranty service provision: A strategic analysis for the E-commerce platform supply chain," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 177(C).
    20. Chark, Robin & Muthukrishnan, A.V., 2022. "Brand effect on extended warranty valuation: Subjective value versus popularity," International Journal of Research in Marketing, Elsevier, vol. 39(4), pages 1082-1092.
    21. Michel, Christian, 2016. "Market Regulation of Voluntary Add-on Contracts," VfS Annual Conference 2016 (Augsburg): Demographic Change 145892, Verein für Socialpolitik / German Economic Association.
    22. Sezgin Çağlar Aksezer, 2023. "Sustainability via Extended Warranty Contracts: Design for a Consumer Electronics Retailer," Sustainability, MDPI, vol. 16(1), pages 1-11, December.
    23. Song, Reo & Jang, Sungha & Wang, Yingdi & Hanssens, Dominique M. & Suh, Jaebeom, 2021. "Reinforcement learning and risk preference in equity linked notes markets," Journal of Empirical Finance, Elsevier, vol. 64(C), pages 224-246.

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