EXPRESS: A Reference-Dependent-Preferences-Based Model of Extended Warranty Purchase Decisions

Durable goods often come bundled with limited-time and sometimes generous factory/base warranties. Yet a sizable number of durable goods customers purchase extended warranties that they rarely make claims against. This study offers a reference-dependent-preferences-based theoretical explanation of why consumers purchase extended warranties even if their purchased good is already covered by a base warranty. Consistent with our theory of reference-dependent preferences, we show that consumers treat base warranties as a reference point, thereby creating a qualitative difference in the valuation of an extended warranty on the purchased product. Specifically, our theory model predicts that the loss aversion motivation for consumers with base warranties results in these consumers valuing extended warranties more favorably than their peers purchasing identical products without a base warranty. The authors validate the predictions from the theory model using observational data from the automobile industry and show how the reference-dependent-preferences-based effect varies with vehicle quality and with macroeconomic conditions. The analyses reveal autobuyers' elevated loss-aversion motivations and higher price sensitivity during weaker macroeconomic conditions than during more robust macroeconomic conditions. Finally, the authors use the empirical model to identify opportunities for auto dealers to engage in targeted price promotions as a function of prevailing macroeconomic conditions. These findings have important implications for marketing managers, as they provide valuable guidance on when an extended warranty should be promoted, to whom and what extended warranty should be marketed.

Protecting brands from product failure using extended warranties

Purpose Product failures can lead to customer dissatisfaction, negative brand attitudes and a loss of brand equity. The purpose of this paper is to investigate whether extended warranties offer a mechanism to mitigate the negative effects of product failure and the mediating role of positive and negative self-directed emotions. Design/methodology/approach The hypotheses are tested using two 2 × 2 between-subjects experiments with product failure and warranty purchase as the two factors, attitude toward the brand as the dependent variable, positive and negative self-directed emotions as mediating variables and attitude toward warranties as a covariate. Findings It is found that the decline in attitude toward the brand due to product failure is greater among customers purchasing an extended warranty, than among those who do not. Moreover, positive and negative self-directed emotions mediate this relationship. Originality/value Manufacturers are for the most part not involved in distribution or administration of extended warranties, which are mainly sold through retailers and administered by companies that specialize in extended warranties. The study findings indicate that contrary to industry practice, consumer-durable manufacturers should consider more active management and promotion of extended warranties to protect their brand’s equity from the negative effects of product failure.

Optimal Pricing Strategies in a Product and Service Supply Chain with Extended Warranty Service Competition considering Retailer Fairness Concern

This paper examines optimal pricing in a two-tier product and service supply chain consisting of a manufacturer and a retailer in the context of vertical competition in extended warranty in two cases: one considering the retailer’s fairness concerns and one without considering the retailer’s fairness concerns. A manufacturer-dominated product and service supply chain game-theoretic model on the Stackelberg model is developed to analyse how the level of vertical competition in extended warranty service and the intensity of a retailer’s fairness concerns influence the optimal pricing of products and extended warranties for the manufacturer and retailer. This study finds the following: (i) Two parties of the supply chain employ differential pricing strategies for extended warranties when the retailer has fairness concerns. (ii) Compared to the same pricing strategies for extended warranty service when the retailer has no fairness concerns, the increase of competition intensity of vertical extended warranty service will enlarge the price difference of extended warranty service. Meanwhile, it is the intensity of fairness concerns that determines the influences of retailer’s fairness concerns on the price difference of extended warranties. (iii) If no fairness concerns are raised, an increase in the level of vertical competition in extended warranty service would benefit both supply chain parties, rather than hurting their profit. If the retailer is fair-minded, its fairness utility increases when the intensity of the fairness concerns rises in a reasonable range and decreases when the intensity exceeds the reasonable range, but for the manufacturer, its profits will be damaged as long as the retailer raises fairness concerns.