Warranty, quality and price in the US automobile market

Abstract

The observed negative relationship between quality and warranty in the US auto market is analysed using a cost-based approach developed by Cooper and Ross. The theory of warranty and quality choice by producers and consumers is extended by endogenizing the joint price, quality and warranty decision. Differences in producer costs and consumer preferences are found to explain the inverse relationship, which suggests that American manufacturers should adjust their pricing, warranty and quality strategy when entering foreign markets.