Pricing Decisions and Provider Choice on Extended Warranty Service in Supply Chain

Introduction

In the era of e-commerce and Big Data, the competition in the commodity market has become increasingly intense, consumer’s consumption concept also gradually changes with the improvement of living standards. Consumers nowadays put forward higher requirements for quality and product service. Therefore, many companies started to add value of product through extended warranty service (EW). Maronick (2007) notes that the majority of American consumers purchase extended warranties while purchasing household electrical appliances. According to statistics, nearly one-third of consumers choose to purchase EW in the foreign auto industry, while the proportion in the household appliance industry is up to 75% (Desai & Padmanabhan, 2004). Liao and Li (2016) show that warranty policy can enhance profit. EW is actually a new profit growth point for companies. Thirty percent revenue of Dell comes from EW (Zhang, 2015). Berner (2004) notes that the profits from extended warranties accounted for almost a half of Best Buy’s operating income in 2003. In China, the EW is first provided by Gome in 2006. In 2008, Suning provided “Sunshine Package” as its EW. In 2013, both Jingdong and T-mall launched their own EW. EW helped enterprises compete for market share and improve their competitiveness, while also needs a certain cost. Therefore, how to balance the input and output of EW gradually becomes the focus of attention.

Literature related to supply chain comes from many sources (Kelepouris et al., 2012, Luitel et al., 2014). In recent years, scholars have studied the issue of EW from the perspective of supply chain. Lutz et al. (1998) study the impact of EW on manufacturer warranty policy under manufacturer moral hazard. Desai (2004) uses the master-slave game to study the coordination of sales channels for EW when there is a competition between manufacturers. Li et al. (2005) consider a supply chain involving an independent retailer and an independent manufacturer, they developed a game theory model to study two common practices of selling extended warranties. Heese (2012), by considering a supply chain containing two competing manufacturers and a retailer, shows that retailer providing EW had a negative impact on manufacturers’ basic warranty. Li et al. (2012) discuss the length of the EW period and the price of the EW when it is respectively provided by the manufacturer, the retailer or a third party. Su et al. (2012) analyze two EW models from the manufacturer's perspective by comparing the EW cost with the expected profit. Wang and Hu (2010) investigate how attractive index of extended warranty influences manufacturers’ EW choice. Zhang et al. (2012) construct a service demand function of EW based on customer’s risk aversion, they establish two models: the manufacturer sales EW directly and sales EW through retailer, and explore the impact of the service level on manufacturer profit. Nie et al. (2014) take quality level of product as an endogenous variable to build a basic model without EW as well as models which manufacturers provide EW and retailers provide EW. The result shows that whichever side provides EW, profits are higher than those without. Yi et al. (2016) investigate supply chain coordination under EW in consideration of network externality. The study shows that under the influence of network externality, two-tariff contract can reach a Pareto improvement in supply chain, thus the chain can be coordinated.