Warranty parameters for extended two-dimensional warranties incorporating consumer preferences

Abstract Certain products, such as automobiles, typically have warranty policies that incorporate two dimensions, namely time since purchase of the product and usage based on mileage accumulated. If both of these parameters are less than stipulated values in the warranty policy, in case of product failure, the manufacturer replaces or repairs the product free of charge. In many consumer durable goods, while an initial warranty is offered during purchase of the product, options exist to renew the warranty in the event of no product failure during the initial warranty. In this paper we consider such extended warranties in the context of two-dimensional policies. The decision variables in the formulated model are the warranty time and usage in the initial policy, the warranty time and usage in the extended policy, the product price, and the premium to be charged by the manufacturer for extending the warranty. We assume, however, that not all customers will choose to renew the warranty even if the product did not fail during the initial warranty. Customer propensity to renew warranty could be influenced by the unit product price and the customer's threshold price level, above which the customer is motivated to purchase an extended warranty.