Consumer Markets for Warranties

This paper considers markets for warranties when consumers are imperfectly informed about both product and warranty prices and about which firms sell with warranties and which firms sell without warranties. We characterize necessary and sufficient conditions for existence of the various equilibrium configurations of price and warranty coverage that can arise in two paradigm cases; when all consumers prefer warranties and when none do. Our results suggest that firms will exploit imperfect information by charging noncompetitive prices as well as by offering less than ideal warranty coverage, and that the former practice may be more serious in many markets than the latter.