Dynamic pricing and warranty policies for products with fixed lifetime
Abstract
Product warranties have been an integral part of production and marketing strategies for a manufacturer to gain market shares and control quality related costs. Since offering aggressive warranty polices could result in a very high cost to a manufacturer, effective design of warranty policies is crucial for him to succeed in today's competitive world. I develop a mathematical model to investigate a policy that jointly considers product pricing and warranty length for a repairable high-tech product over its effective lifetime. It is assumed that the manufacturer provides a commitment to correct problems if the product fails in the warranty period. The customer has to repair the product if the product fails after the warranty expires. It is further assumed that all the customers are risk averse toward uncertain repair costs. The goal of the manufacturer is to determine a joint dynamic pricing and warranty policy that maximizes his profit. My results show that when the manufacturer is a market monopolist, the best strategy is to charge the highest possible price and offer the longest warranty. However, if competition exists in the market imposing some limit on the price or warranty, the manufacturer should pursue a unique optimal combination of pricing and warranty length. In the latter case, the optimal warranty length is positively related to the initial price but negatively related to the price decreasing rate. A further study on the purchase behavior of consumers consistently supports that a consumer's purchase time is affected by both the product price and the warranty length. In particular, more risk-averse consumers tend to make a purchase at a later time. I consider not only dynamic pricing but dynamic warranty policies as well to fit for the situation where the product's remaining lifetime varies in time. My results show that when the manufacturer has an option to change both product price and warranty length, the better policy is to keep the price unchanged but increase the warranty period to attract more risk-averse consumers.
Degree
Ph.D.
Advisors
Tang, Purdue University.
Subject Area
Management
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