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Monopoly Provision of Product Warranties

Tan, Guofu (1989) Monopoly Provision of Product Warranties. Social Science Working Paper, 678. California Institute of Technology , Pasadena, CA. (Unpublished)

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This article considers the problem of monopoly provision of product warranties when consumers are heterogeneous and when the probability of product malfunction depends on both the quality of the product and on the consumers' care. The optimal warranty contract is characterized to maximize the expected profit for the monopolistic seller. The properties of the optimal contract depend on the nature of the product. If the quality of the product is more important as a determinant of reliability than consumer care then standard results are obtained; that is, a positive correlation between warranties and reliability and between price and reliability are observed, and higher type buyers buy more expensive versions of the product with higher warranties. On the other hand, if consumer care is more important in increasing reliability, the results are exactly opposite; for example, there is a negative correlation between warranty coverage and reliability. Also, when consumer care is important, higher type buyers buy versions of the product with lower warranty and lower quality. Other features of the optimal warranty contract are also characterized in this paper.

Item Type:Report or Paper (Working Paper)
Additional Information:Revised. Original dated to July 1988. Financial support from John Randolph Haynes and Dora Haynes Foundation Fellowship is gratefully acknowledged. An early version of this paper was presented at the 1988 Western Economic Association Meetings in Los Angeles, July 1 to 3. I would especially like to thank John Ledyard for motivation and very helpful comments. I would also like to thank Richard Boylan, Chuck Coleman, Thomas Gilligan, Alan Schwartz and the participants in the Caltech Social Science Seminar for discussions and comments. Suggestions from two referees are also acknowledged. Any remaining errors are solely my responsibility.
Group:Social Science Working Papers
Funding AgencyGrant Number
John Randolph Haynes and Dora Haynes FoundationUNSPECIFIED
Series Name:Social Science Working Paper
Issue or Number:678
Record Number:CaltechAUTHORS:20170906-133509554
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Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:81192
Deposited By: Jacquelyn Bussone
Deposited On:06 Sep 2017 21:53
Last Modified:03 Oct 2019 18:39

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