Discounted and Per Unit Costs of Product Warranty

This paper proposes a detailed model of the costs and benefits to producers and consumers of product warranty. Three common types of product warranty contract are considered. In addition, we explicitly allow for randomness in consumer repurchase behavior and for the possibility of an independent damage process acting on products sold under warranty. The cost criteria considered are discounted costs (profits) and per unit costs (and profits). The model is used to analyze the trade-off between warranty and quality control, and to illustrate the sensitivity of warranty costs to environmental variables.