Optimal Reliability Choice in Product Design

In designing new products, the reliability of the product is an important variable. Greater reliability implies higher unit cost and hence higher selling price. The buyer's decision to pay a higher price is influenced by the signaling mechanism which conveys information about product reliability. Product warranty is one such signal. The total sales depend on marketing variables such as selling price and warranty. The cost of servicing warranty depends on product reliability. This implies that decisions regarding product reliability at the design stage must be done in a framework which takes into account the marketing variables. In this paper, we develop a simple model which integrates marketing variables into the design phase and the reliability decisions are made jointly with marketing variables to maximize total profits.