Durable Good, Extended Warranty and Channel Coordination

Abstract

The marketing literature on product warranty and extended warranty has largely focused on their role as segmentation instruments in risk-averse consumer markets. Preserving this insurance rationale, we highlight the role of extended warranty in channel coordination.We derive explicit demand functions for the durable good and extended warranty from a traditional model of consumer utility. This derivation explicitly captures the complementary goods flavor of extended warranty. We then investigate the impact of different distributional arrangements commonly observed in the marketplace for market outcomes and manufacturer profitability. We show that two key forces drive the results-the complementary goods effect and the double marginalization effect. Different channel arrangements for marketing of extended warranty cause these effects occur at different levels within a distribution channel and these are shown to have significant implications for the optimal warranty policy.