Supply Chain Coordination for Strong Retailer with Extended Warranty under Network Externality

Abstract

This paper constructed a retailer-leading supply chain system considering the extended warranty (EW) with single manufacturer and single retailer to study the influence of network externality on retailer-leading supply chain coordination. First of all, we analyzed and compared the retail price, EW price, EW quality, and the total system profit in centralized and decentralized model respectively. Then we analyzed the influence of network externality on decision variables and system profits. We found that the network externality increased the loss of decision efficiency. After that, we considered the coordination of the supply chain system with extended warranty. Finally, some numerical examples were presented for further analysis. KeywordsExtended Warranty, Network Externality, Contract Coordination, Game Model, Two-Part Tariff pects: one is the design of the extended warranty, which is researched from the points of view such as cost of extended warranty [3], range of extended warranty [4], customers' risk preferences [5], period of extended warranty [6], the additive demand [7] and so forth. The second is about the selection of supply chain extended warranty mode and its optimization. Desai and Padmanabhan [8] studied the coordination of extended warranty distribution channels from manufacturers' standpoint and its research results showed that the hybrid channel was manufacturers' optimal choice. Wang and Hu [9] studied how attractive index of extended warranty influenced manufacturers' choice of provision modes of extended warranty in the form of modeling. In addition, Zhang et al.[10] studied the effects of service level on supply chain and manufacturers' optimal choice of extended warranty sales channels.Obviously, the papers above provide some good ideas for the related researches of extended warranty, but currently the studies are confined to the situation of manufacturers dominating the supply chain. The problem of supply chain coordination that strong retailers dominate the supply chain and provide extended warranty (such as Gome and Suning described above) is not yet considered.In the meantime, many products, such as mobile phones, computers and so on, have the characteristics of network externality in the network economy era. And in the reality, the commodities such as mobile phones, computers with network externality are the target customers of extended warranty. Katz and Srapiro [11] defined network externality as that a single consumer's utility increases with the increase of the total number who buy the same products. Shankar and Bayus [12] summed up that the influencing factors of network externality were network scale and the intensity of network externality. And the intensity of network externality refers to the marginal effect of the network scale increasing per unit on demand. They also pointed out that the intensity of network externality depended on the factors such as customer preferences, characteristics of consumers' background, customer loyalties and so on. After their researches, scholar...

Should a retailer sell its own extended warranties or resell those from the manufacturer when confronting supplier encroachment?

“…Subsequently, Heese (2012) has considered the interactions between two competing manufacturers who sold their products through a single independent retailer, who also sold extended warranties. Considering the emerging influence of network externality on supply chain, Tan et al (2015) then studied retailer-leading supply chain coordination with the extended warranty and found network externality exacerbated the efficiency loss of decision making. Recently, Zheng et al (2018) developed theoretical models regarding selling flexible extended warranty, and they find that flexible warranty is always superior to the traditional extended warranty when the cost efficiency of warranty is relatively high and/or the length of warranty is relatively short.…”