Optimal extended warranty pricing and retailing strategies in a closed-loop supply chain

Abstract

Extended warranties are widely adopted and accepted in the marketplace by manufacturers and retailers as it helps to enhance the customers' post-sale satisfaction. In closed-loop supply chains, the extended warranty not only generates profit for the manufacturer, but also provides warranty returns of the new products for remanufacturing. In this paper, a two-period model is developed and optimal pricing strategies for the extended warranties are derived. We compare the optimal pricing and retailing strategies of the extended warranties for remanufactured and new products offered by the manufacturer with and without the retailer's own extended warranty while considering the competition between the manufacturer and the retailer for the extended warranty of new products. We find that the introduction of the retailer's extended warranty does not always hurt the manufacturer's profit. Numerical analyses also show that there exists an optimal extended warranty length for the manufacturer that maximises its profit. Moreover, we show that the retailer cannot extract more profit by increasing the length of its own extended warranty.

Keywords:

• Extended warranty
• remanufacturing
• pricing
• closed-loop supply chain
• Stackelberg game

Acknowledgments

We thank the editors and anonymous reviewers for their constructive feedback and suggestions.

Data availability statement

As the the paper does not use data, data availability is not applicable for this study.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by the Canadian Natural Science and Engineering Research Council (NSERC) grants awarded to the second, third and fourth authors through the Discovery Grant Program.

Notes on contributors

Zhuojun Liu

Zhuojun Liu is a Post-Doctoral Fellow in the Department of Finance, Information Systems & Management Science, Saint Mary's University. He holds a Ph.D. (2021) in Industrial Engineering, from Dalhousie University. His research interests include remanufacturing and sustainable supply chain management.

Jing Chen

Jing Chen is a William A. Black Chair in Commerce at the Rowe School of Business and a Professor at Department of Industrial Engineering, Dalhousie University. She received her Ph.D. in Management Science from the Richard Ivey Business School, Western University. Her research interests include competitive channel and supply chain management, and interface between operations management and marketing.

Claver Diallo

Claver Diallo Ph.D., P.Eng., is Professor in the Department of Industrial Engineering at Dalhousie University in Halifax, Nova Scotia. He holds a Ph.D. and a Master of Applied Science degree in Industrial Engineering, and a bachelor's degree in Mechanical Engineering from Laval University, Quebec, Canada. He is a member of the Institute of Industrial and Systems Engineering (IISE), Canadian Operational Research Society (CORS) and Engineers Nova Scotia. His current research is focused on production and distribution systems design within the Industry 4.0 context which includes hyperconnected logistics networks, smart production planning and control, sustainable supply chain management, and reliability engineering & predictive maintenance.

Uday Venkatadri

Uday Venkatadri Ph.D., P.Eng., is Professor in the Department of Industrial Engineering at Dalhousie University in Halifax, Nova Scotia. He has taught at Dalhousie University since July 2001 and also served as Department Head. He holds a Ph.D. in Industrial Engineering from Purdue University, a Master of Science degree in Industrial Engineering from Clemson University, and a Bachelor's degree in Mechanical Engineering from IIT-BHU, Varanasi, India. His research interests are in smart and hyperconnected logistics networks, facilities planning, production planning and control, and sustainable supply chain management. He is a senior member of the Institute of Industrial Engineers (IIE), a member of the Canadian Operational Research Society (CORS) and a member of Engineers Nova Scotia.