How Does a Retailer's Service Plan Affect a Manufacturer's Warranty?

A Summary Service plans are a type of warranty contract under which retailers promise to repair or replace products for consumers. Separate from manufacturers' warranty policies, which typically come bundled with the products, and also known as service contracts, protection plans, or retailer extended warranties, retailers' service plans are optional and usually offer broader and more prolonged coverage than those offered by manufacturers' base warranties. Today, these plans are available for almost all durable goods in retail stores, and so pervasive that it is rare to find a major retailer in the U.S. that does not provide them. In fact, it has become the norm that, when purchasing a product, consumers are faced with warranties offered by multiple parties, typically the manufacturer base warranty that is bundled with the product and an optional retail service plan. It is well documented that manufacturers use warranties to protect consumers against product failure and to signal product quality. In this paper, we argue that these roles of the manufacturer's warranty can be affected by the offering of retail service plans. From the consumer's point of view, the retailer's service plan complements and can even substitute for the manufacturer's base warranty. Given that the retailer has already offered a more extended warranty, it seems obvious that the manufacturer should offer a minimal warranty so as to avoid free-riding on the part of the retailer. So why does manufacturer still offer a base warranty? More generally, what motivates manufacturers to offer a base warranty when service plans are available to consumers? What are the strategic interactions between the retail service plan and the manufacturer base warranty? How do these service plans affect the role of manufacturers' warranties and channel performance? Regardless of the prevalence of service plans in the retail sector, studies on these plans and their interactions with manufacturers' warranties are scarce. The present research strives to contribute to a better understanding of the role of the retail service plan in distribution channels in which the manufacturer also offers a (base) warranty. Our investigation starts with a context in which consumers are able to assess product quality-in this research, high quality refers to a high degree of reliability in product performance (or a low risk of product failure). It then addresses the more interesting scenario of consumers being unable to assess that quality. It is well accepted that when quality is unobservable to consumers, …