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Title: An empirical test of warranty theories in the server and automobile markets
Authors: Chu, J. 
Chintagunta, P.K.
Keywords: Automobile market
Second-degree price discrimination
Server market
Issue Date: 2011
Citation: Chu, J.,Chintagunta, P.K. (2011). An empirical test of warranty theories in the server and automobile markets. Journal of Marketing 75 (2) : 75-92. ScholarBank@NUS Repository.
Abstract: Four theories on the economic rationale for warranty provision have been proposed in the literature: (1) Warranties provide insurance to customers and work as a risk-sharing mechanism, (2) warranties are a sorting mechanism and work as a means for second-degree price discrimination among customers with different risk preferences, (3) warranties work as a signal of product quality to consumers under information asymmetry, and (4) warranties work as an incentive mechanism for firms to reveal and improve product quality. The authors examine the conditions under which each theory would apply and derive testable implications from the data. They then assess whether these theories have empirical support in the server and automobile markets in the context of manufacturer base warranties. The results indicate that in both markets, warranties primarily provide customers with insurance against product failure, and warranties of different durations work as a sorting mechanism across customers with different levels of risk aversion. Warranties are not used to signal product quality or to provide an incentive for manufacturers to reveal or improve product quality. © 2011, American Marketing Association.
Source Title: Journal of Marketing
ISSN: 00222429
Appears in Collections:Staff Publications

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