How does a retailer's service plan affect a manufacturer's warranty?

Bo Jiang, Xubing Zhang

Research output: Journal article publicationJournal articleAcademic researchpeer-review

74 Citations (Scopus)


Aservice plan is a type of optional warranty beyond manufacturers' base warranties that retailers offer to consumers. In this paper, we examine how a service plan affects the role played by a manufacturer's base warranty. Analysis shows that when consumers can assess product quality (i.e., the probability of product failure), the manufacturer's warranty is negatively affected by the presence of a service plan. In the presence of such a plan, a base warranty is offered only when the manufacturer is very cost-efficient in providing a warranty relative to the retailer. In this case, although the double-marginalization problem is aggravated, offering a (limited) base warranty reduces the total warranty cost in the channel and provokes the retailer into enlarging the service plan coverage. When consumers cannot assess product quality, a high-quality manufacturer is motivated to offer a base warranty to signal its quality. In the presence of a service plan, however, a very cost-efficient manufacturer is discouraged from doing so.
Original languageEnglish
Pages (from-to)727-740
Number of pages14
JournalManagement Science
Issue number4
Publication statusPublished - 1 Apr 2011


  • Distribution channels
  • Game theory
  • Service plans
  • Signaling
  • Warranty

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research


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