Modelling risks to manufacturer and buyer for lifetime warranty policies

Abstract

Currently, manufacturers/dealers have started selling products with lifetime warranty policies. In this paper, risk attitudes of both buyers and manufacturer/dealers to lifetime warranty policies are discussed. In line with Chun and Tang (1995) [2], Risk models are developed for products with time dependent failure intensity (rate). These models have been proposed with Non homogeneous Poisson’s process for failure intensity function, a constant repair cost, and concave utility function. Using the exponential utility function, the decision models are developed to maximise the manufacturer/dealer’s certainty profit equivalent. Risk preference models are developed to find the optimal warranty price through the use of the manufacturer’s utility function for profit and the buyer’s utility function for repair costs. Finally, the sensitivity of the warranty price models is analysed using numerical examples.

Keywords:

• lifetime warranty
• risk preferences
• warranty price
• buyer’s repair cost