Optimal warranties, reliabilities and prices for durable goods in an oligopoly

• Published in: European journal of operational research Vol. 112; no. 3; pp. 554 - 569
• Main Author: DeCroix, Gregory A.
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.02.1999; Elsevier; Elsevier Sequoia S.A
• Series: European Journal of Operational Research
• Subjects: Applied sciences; Durable goods; Exact sciences and technology; Game theory; Lattice programming; Marketing; Oligopoly; Operational research and scientific management; Operational research. Management science; Operations research; Optimization; Optimization. Search problems; Product reliability; Studies; Warranties; Warranty; Lattice programming; Warranty; Game theory; Marketing; Reliability; Optimization; Oligopoly
• ISSN: 0377-2217; 1872-6860
• DOI: 10.1016/S0377-2217(97)00418-9

This paper addresses the problem of durable goods manufacturers in an oligopoly seeking optimal values for three decision variables: product warranty, reliability and price. Each firm seeks a warranty-reliability-price combination that maximizes expected profit subject to quite general constraints on the firm's decision variables. Warranty serves as a signal of product reliability, which is not observable by consumers. We present a game-theoretic model of warranty-reliability-price competition in such a market and examine Nash equilibria for this game. We show that under fairly general assumptions each firm can optimally set its warranty and reliability independently of price and competitors' actions. In addition, we show that optimal warranties and reliabilities are complementary, and we explore the impact of different market factors on the optimal warranty and reliability. Finally, we show that optimal warranties are longer and products more reliable when consumers are risk averse.