Manufacturer encroachment and extended warranty provision

Abstract

This study focused on the interactions between manufacturer encroachment and extended warranty (EW) provision by examining the manufacturer's optimal encroachment decision with or without the extended warranty and the optimal EW provision decision under encroachment or no encroachment. Based on the combination of the two strategies, this study discussed four different models in which the manufacturer and retailer act as the Stackelberg leader and follower, respectively. It was shown that the manufacturer always finds it optimal to offer EW without encroachment. However, under encroachment, the manufacturer's motivation to offer EW weakens. Furthermore, when EW is not offered, the manufacturer can benefit from encroachment if the selling cost of the product is not sufficiently high. When the selling cost of EW is low, the manufacturer's motivation for encroachment strengthens. As the selling cost becomes moderate to high, offering EW weakens the manufacturer's motivation for encroachment. Our analysis reveals that for different values of the co-payment rate and the manufacturer's selling costs of products and EW, encroachment and EW provision may reinforce or impair each other. Therefore, manufacturer has to pay attention to the influence of one decison on another decision.