Optimal warranties, reliabilities and prices for durable goods in an oligopoly

This paper addresses the problem of durable goods manufacturers in an oligopoly seeking optimal values for three decision variables: product warranty, reliability and price. Each ®rm seeks a warranty-reliability-price combination that maximizes expected pro®t subject to quite general constraints on the ®rm's decision variables. Warranty serves as a signal of product reliability, which is not observable by consumers. We present a game-theoretic model of warrantyreliability-price competition in such a market and examine Nash equilibria for this game. We show that under fairly general assumptions each ®rm can optimally set its warranty and reliability independently of price and competitors' actions. In addition, we show that optimal warranties and reliabilities are complementary, and we explore the impact of di€erent market factors on the optimal warranty and reliability. Finally, we show that optimal warranties are longer and products more reliable when consumers are risk averse. Ó 1999 Elsevier Science B.V. All rights reserved.