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"Design of Extended Warranties in Supply Chains"

Kunpeng Li, Dilip Chhajed, and Suman Mallik

 

First Author :

Kunpeng Li
Business Administration
University of Illinois at Urbana-Champaign, College of Business
1206 S. Sixth Street
350 Wohlers Hall, M/C 706
Champaign, IL 61820
USA

kli@uiuc.edu


Second Author :

Dilip Chhajed
Business Administration
University of Illinois at Urbana-Champaign, College of Business
1206 S. Sixth Street
350 Wohlers Hall, M/C 706
Champaign, IL 61820
USA

chhajed@uiuc.edu

http://www.business.uiuc.edu/faculty/chhajed.html


Third Author :

Suman Mallik
Business Administration
University of Illinois at Urbana-Champaign, College of Business
1206 S. Sixth Street
350 Wohlers Hall, M/C 706
Champaign, IL 61820
USA

mallik@uiuc.edu

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Abstract :
 
Consider a supply chain involving an independent retailer and an independent manufacturer. The manufacturer produces a single product and sells it exclusively through the retailer. Using this supply chain framework, we develop a game theoretic model to study two commonly observed practices of selling extended warranties: the manufacturer offers the extended warranty directly to the end consumer, and the retailer selling the product offers extended warranty. We show that, of the two decentralized systems, when the retailer offers an extended warranty, it is for a longer duration and generates more system profit. We compare and contrast the two decentralized models with a centralized system where a single party manufactures the product, sells to the consumer and offers the extended warranty. We identify the different causes of inefficiencies in each of the two decentralized models and propose coordination mechanisms that eliminate the inefficiencies. We also provide contracts to achieve both coordination and a Pareto improvement over a wholesale price contract.
 
 
Keywords :
 
extended warranty, game theory, supply chain management
 
 
Manuscript Received : 2005
Manuscript Published : September 2005
 
 
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