Essays on Extended Service Contracts

Extended service contracts have been the major profit generator for many consumer electronics retailers as they contribute to half of the retailers' profit. My dissertation studies how consumers make purchase decisions of extended service contracts and how the ESC purchase decisions are related to the product purchase decisions. Essay 1: " Why Do Consumers Buy Extended Service Contracts? " The first essay in my dissertation examines factors that influence consumer purchases of ESCs for electronic products in a retail setting. ESCs are essentially insurance products. The major insurance purchase determinants are the perceived probability of loss, the extent of loss, risk aversion, and the amount of the insurance premium. This essay examines how product characteristics (hedonic/utilitarian) and retailer actions (promotions and contract coverage) influence the purchase of ESCs. It also investigates the impact of consumer characteristics (sex, income, and prior usage) on these purchase determinants. The predictions are tested using revealed preferences from panel data of electronic purchases covering several product categories. The second essay examines consumers' inter-temporal pattern of product adoption and ESC purchases across product shelf lives. Recognizing the fact that consumers strategically delay their product adoption, this paper focuses on how fast declining product prices affect consumer purchase 3 propensity of ESCs and whether the decreasing ESC prices help the electronics retailers to sell more ESCs. The results show that consumers are more likely to purchase ESCs during the early stages of the product's shelf life because of the higher risk associated with replacement costs and uncertainty. Quickly declining product prices significantly decrease consumers' propensity of purchasing ESCs. The current decreasing trend of ESCs further destroys ESC value by encouraging consumers to delay product adoptions. The simulation results show that sometimes an increasing ESC price trend helps encourage consumers to adopt the product earlier, which increases their propensities to purchase ESCs, because it is more aligned with consumers' strategic behavior. Examining how consumers make decisions under uncertainty is a fertile field of research in several domains. The purchase of extended service contracts provides an excellent opportunity to understand consumer behavior under uncertainty in a field setting. Extended Service Contracts (ESCs) are usually offered by retailers and sometimes by manufacturers to lengthen the coverage provided by the manufacturer's basic warranty. They are also sometimes referred to as Extended Warranties or Extended Service Plans. Technically, ESCs are insurance products which require consumers to pay premiums up front for protection …