Determination of Risks to Manufacturer and Buyers for Lifetime Warranty Policies by Considering Uncertainties of Lifetime

Abstract

The warranty period offered by the manufacturer has been progressively increasing since the beginning of the 20th Century. Due to fierce competition and customer demand, manufacturers have started selling products with lifetime warranty policies. Under such policies, both the manufacturer and the buyer are exposed to uncertainties and risks of warranty pricing and product performance since products lifetime are uncertain and are not defined well in these policies. This paper extends the work of Chattopadhyay and Rahman (COMADEM 2005) to determine the manufacturer's and buyer's risk preferences by capturing the uncertainties of warranty duration in the lifetime warranty. Using the exponential utility function, the decision models are developed to maximise the manufacturer'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.